30 Oct 2019
So says David Lewis, Executive Secretary of the FATF, in relation to the Mutual Evaluation [ME] Reports published in respect of countries assessed by the FATF. He also believes in what he does and what you and I do as fellow members of the Global AML/CTF Community. He believes in stopping the harm caused by laundering the money generated from drug trafficking, people trafficking, wildlife trafficking, illegal logging and much, much more.
In a recent interview with KYC360, David was critical of the FATF and he made reference to a strategic review which will take place under the current Chinese presidency. He expressed frustration when he said,
I’ll be open about this: the way we evaluate [ME} countries at the moment promotes an un-level playing field, which is contrary to what we are trying to achieve through global standards. The reason it does that is we assess every country sequentially, it takes a year and there are ten years between one country and another being assessed. We know that countries only act upon AML/CTF in the two years before their assessment [ME}. If we know that, we have to start looking at other ways of assessing these countries and maybe, being more targeted. We might look at…beneficial ownership measures. Let’s look at all countries at the same time and publish the results, instead of looking at a country once every ten years.
So changes to the evaluation [ME] process maybe on its way. Why? Well, that’s because David Lewis has the courage to be self critical of the FATF and the political capacity to make it happen. Under his tenure (four years as of November 2019), he has ensured AML/CTF is at the top of the agenda for G20 finance ministers and central bankers alongside other major global issues they are dealing with. It’s an outstanding achievement and we should all reflect upon how relevant and important our own work is in the area of AML/CTF.
Scandinavian money laundering cases
Thus, what is it about the Mutual Evaluation [ME] reports, that David believes in. To give this context, I asked David what went wrong in Scandinavia (Scandalnavia, as I called it) and here’s what he said’
It chimes with the results of our evaluations [ME]. Initial evaluations referenced high levels of technical compliance….but when we went back this time and started looking at effectiveness. I think they were probably complacent about the risks around AML/CTF. It wasn’t a high priority for them, they didn’t really focus upon it. As a result their quality of supervision was not what it should be and our reports [ME] highlighted that. And the understanding of the risks from the banking sector was also not what it should have been. So it’s not surprising to me that we come across these cases because supervisors didn’t have their eye on the bal. The bankers themselves did not have their eye on the ball. This is the problem, when you look at the countries we have evaluated [ME], so far about 80. If you look at the results of supervision, 75% of those countries fail on effectiveness. Which means they either need to make fundamental or substantial improvements to their supervision. When you look at the preventative measures we expect banks to take, it’s a 100% failure rate.
I thought this was profound thinking and talking, therefore, given the prevalence of U.K. incorporated LLP entities in the Scandinavian laundering cases, as well as others originating from Latvia, Moldova and others, I asked him about designated non-financial service businesses (DNFSBs), and here’s what he said,
Professional enablers [DNFSBs] has been an overlooked area in our evaluations [ME] quite frankly and by most governments for a long time… often the focus is mostly upon banks and we don’t have sufficient focus upon lawyers, accountants and estate agents…
One of the areas we are looking at is whether we should split out our evaluation [ME] of those businesses [DNFSBs] from banks, because at the moment they don’t get sufficient focus.
Beneficial ownership and UK Companies House
Given the prevalence of UK incorporated LLP entities within so many money laundering investigations, including those in Scandinavia, together with the roles played by DNFSBs in setting up and administering these LLP entities, I asked David about beneficial ownership and UK LLP entities and this is what he said,
The UK now have a public register of beneficial ownership, but there is no verification of the information that goes into the register…..When you create a bank account you need to show proof of identity, often the same applies to social media accounts. You need to have some kind of identity check these days. But, you can set up a company, which gives you limited liability, allows you to hire and fire people, create other companies and you are not required to provide any proof of identity. We have known for decades companies and trusts are used and abused in every money laundering case. It is time we got serious on this. A public register of beneficial ownership is the icing on the cake, but if you don’t have the cake, there is no point in having the icing.
Undoubtedly there is more work to be done. Perhaps a cake needs to be baked, such that there is a need for the application of identity verification procedures to make beneficial ownership registers useful and effective. Then the icing can be applied.
Clearly, David Lewis has a good understanding of the issues and is prepared to confront them, in particular AML supervision. He informed us of an initiative under the current Chinese Presidency to look at ways to improve supervision and this is what he said,
We need to understand the challenges supervisors are facing. And why supervision why supervision is not working, they are not applying a risk based approach. In many cases they are encouraging a zero tolerance approach, which just promotes ‘’tick box’’ compliance. So we need to have a proper conversation with supervisors to get them to understand what we want to achieve. And see if there are things we need to do with changes to our standards and guidance to help supervisors to do a better job.
In contrast, David had praise for the banks.
They have completely changed their game in the last ten years and they are investing heavily in this [AML/CTF], they are investing heavily in training. They are now allies and I hope that lasts.
David and I discussed the proactive approach by some banks to tackling the threats from money laundering and the predicate crimes, as well as the collaboration of banks in the fight against organized crime groups trafficking drugs, people and wildlife. He made reference to the ongoing public – private partnerships in many countries, but did note with caution the tensions with some privacy laws, which he wanted to address in the coming months and years.
As David is the de facto leader of the global AML/CTF community, I asked him for a parting message for his soldiers and this is what he said,
This is not about technical compliance, it’s not about financial crime, It’s all about the harm being caused on the streets by drug trafficking, people trafficking, fraud … and it’s about dealing with these threats effectively and in a common sense way, which is what a risk based approach is. You’ve got limited resources, make sure the resources are targeted where the risks are. This is not about ticking boxes. This is about focusing where the risks are and stopping harm.
Perhaps the second round of evaluations, focusing upon effectiveness inform all of us where the risks maybe found and who else may have taken their eyes off the balls.
I sense change is coming, because David Lewis said so and I for one, believe in him. You can listen to the full interview and the insightful, thought provoking words of David Lewis by visiting the KYC360 webpage or clicking upon the link below.
Best known as the “Wachovia Whistleblower”, AML Talk Show host Martin Woods was formerly a Metropolitan Police Officer and latterly the Head of Financial Crime at Thomson Reuters.
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