Money laundering and terrorism financing are monitored by the Financial Action Task Force (FATF). Through its work, it helps member countries to fight money laundering and terrorist financing more comprehensively and with the most modern tools. It is currently working on a recommendation document to add new elements to the transparency obligations of companies and trusts. In this article, we explore these new guidelines in detail.
What is Financial Action Task Force?
In order to fight money laundering and terrorist financing, the Financial Action Task Force (FATF) sets international standards. To protect the financial system from the risks of money laundering and terrorist financing and to better comply with the international strategy, FATF identifies countries with strategic AML/CFT gaps. It requires these countries to develop an action plan and address the identified vulnerabilities within the specified timeframe. It continuously assesses and monitors the steps taken and the results achieved, and regularly calls on high-risk and non-cooperative countries to take action.
Why is it important to fight money laundering and terrorist financing?
In short, these are criminal offenses, which is why all countries are trying to crack down on them as rigorously as possible.
- Money laundering is one of the financial crimes: It aims to make financial gains obtained illegally or through criminal activity appear as capital gains from legitimate sources.
- In combating terrorist financing, authorities try to prevent terrorist organizations from obtaining new financial resources. These organizations often operate legitimate-looking companies or other legal entities (including trusts) through which they can raise money anonymously, through clandestine or opaque channels, from their supporters.
What is the current regulatory environment in the EU?
The risk of money laundering and terrorist financing is a major challenge both for the EU’s financial system and for the security of its citizens. Over the years, the EU has developed a solid regulatory framework in this area. However, these rules need to be continuously adapted to address the risks posed by the following factors:
- Technological innovation – such as virtual currencies
- The increasing integration of financial movements in the internal market
- The global nature of terrorist organizations
- The ingenuity of criminals seeking to exploit systemic weaknesses and legal loopholes
Given the global nature of these challenges, increased international cooperation in this area is needed. The EU is working with its partners in the Financial Action Task Force (FATF) to develop and implement international standards.
The EU will further strengthen its fight against money laundering and terrorist financing.
Stricter anti-money laundering rules have been in place since 2018. These rules make it more difficult to hide illicit funds through front companies and tighten controls for high-risk third countries. They also strengthen the role of financial supervisory authorities and improve access to and exchange of information.
To further strengthen the EU’s anti-money laundering and counter-terrorist financing framework, the Council adopted strategic priorities in December 2019. Following these strategic priorities, the Commission produced an Action Plan in May 2020. The Action Plan sets out the actions to be taken over the next 12 months to improve the implementation, monitoring, and coordination of EU rules in this area.
What improvements does the FATF propose to increase transparency?
For cryptocurrencies, non-fungible tokens, and similar virtual currencies that are extremely transparent in their movements but almost completely hide their ownership, the FATF also recommends risk assessment and risk management – not only at the member state level but also at the corporate level. This is another strong impetus for countries to draft virtual money laws and implement existing recommendations.
All countries would be required to assess and mitigate the anti-money laundering risks associated with certain legal persons created in foreign countries, just as they are currently required to do for all legal persons created in the country. The FATF believes this extension is necessary due to the use of cross-border ownership structures to conceal beneficial ownership, although there are practical challenges in identifying and assessing foreign-created legal persons. Accordingly, it seeks a risk-based approach that limits the scope of the measure to foreign-registered legal persons with “sufficient” links to the countries concerned.
An additional proposal from the FATF relates to the use of ‘multi-pronged approaches’ to gather beneficial ownership data. On the basis of the experiences of countries that have beneficial ownership registries, the FATF is considering how elements of a multi-pronged approach can be incorporated and what supplementary measures might be implemented. Besides centralized registries, the consultation is seeking comments on alternative approaches that are not restricted to centralized registries, such as requiring financial institutions and non-financial professionals to hold beneficial ownership information.
Other actions emphasized in the new guidelines document:
- The FATF urges transparency in the financing of environmentally damaging activities, as experience shows that money laundering is often linked to environmental damage (e.g., the transfer of wildlife).
- However, the organization is also looking at the impact of new transparency regulations, for example, requiring companies to collect data or increased transparency in cryptocurrencies on the global economy as a whole.
- New countries have come under closer monitoring: Jordan, Mali, and Turkey have all pledged to step up their efforts to combat money laundering and terrorist financing, with deadlines and specific targets.
How might this affect the institution of trust?
Although this may be discouraging for our clients who seek anonymity and discretion, we want to assure everyone that the tightened control is not aimed at those who operate legally. The new rules, if implemented, will give beneficial owners of offshore assets fewer opportunities to remain anonymous.
Ultimately, this is another argument in favour of trusts. This asset management methodology will continue to provide the kind of anonymity that has been one of its greatest advantages in the past.