I. The legislative framework and international cooperation

To combat such criminal activity, the G7 Summit established in 1989 the Financial Action Task Force on Money Laundering (FATF) to develop a co-ordinated international response. One of the first tasks of the FATF was to develop 40 recommendations, which set out the measures national governments should take to implement effective anti-money laundering programmes. The first version of the 40 Recommendations was adopted in 1990 and the first and second revisions occurred respectively in 1996 and 2003. The scope of action of the FATF has been enlarged after 9.11events to capture the financing of terrorist activities (8 Special Recommendations on Terrorist Financing).

The FATF has drawn up a "blacklist" of countries considered non-co-operative and a "grey-list" of countries which, without being deemed non-co-operative, have insufficient means against money laundering.

1. On anti-money laundering

The 40 Recommendations: The FATF 40 Recommendations are a comprehensive scheme for action against money laundering. They cover the criminal justice system and law enforcement, the financial system and its regulation, and international co-operation. Implementation of the 40 Recommendations by the FATF’s members (see note 1 below) is monitored in two-ways: an annual self-assessment exercise and a mutual evaluation process under which each member country is subjected to on-site examinations. In addition, the FATF carries out cross-country reviews of measures taken to implement specific recommendations. Those recommendations have been updated in June 2003 and apply now also to the financing of terrorism (see below).

Some of the basic obligations contained in the Recommendations are:

• criminalisation of the laundering of the proceeds of serious crime (R.1) and the enactment of laws to seize and confiscate the proceeds of crime (R.3);
• for financial institutions to identify all their clients (know your customer rules), including all beneficial owners of property, and to keep appropriate records (R.5 to R.7);
• a requirement for financial institutions to report suspicious transactions to the competent national authorities (R.13), and to implement a comprehensive range of internal control measures (R.15); those recommendation apply to non-financial professions (R.16);
• an adequate system for the control and supervision of financial institutions (R.23 to R.25);
• the need to enter into international treaties or agreements and to pass national legislation, which will allow countries to provide prompt and effective international co-operation at all levels (R.35 to R.40).

The revised Recommendations have introduced the interesting concept of customer due diligence requirements tailored to the risk involved (R.5) . The development of certain money laundering methods is emphasised: utilisation of on-line banking services, trusts and bearer shares and other structures not constituted in companies, and involvement of lawyers, notaries, accountants and other professionals.

The European directives: The European Commission is a full member of the FATF, representing the European Communities. It adopted Directive 91/308 of 10 June 1991 relating to the prevention of the use of the financial system for the purpose of money laundering, which is frequently quoted as one of the major international instruments in the field of the fight against money laundering. This directive has been amended a first time by directive 2001/97 of 4 December 2001. It extends the definition of money laundering to almost all serious offences (although following a political compromise, Member States are left with a certain margin for manoeuvre in the definition of “serious offences”). It also extends the obligations under the directive to non-financial professions such as lawyers, notaries and accountants. The second directive contains a provision imposing special care (but leaving the choice of the means to the Member States) concerning identification in on-line banking transactions. Finally, a provision requiring concrete feedback from the Financial Intelligence Units (FIUs) to the reporting professions was strongly welcomed by industry.

2. On terrorist financing

The 40 FATF Recommendations now also apply to the financing of terrorism. However, in order to address more specifically the issue of terrorist financing, the FATF published 8 Special Recommendations in October 2001. Those recommendations invite FATF members to criminalise the financing of terrorism, to organise the freezing of terrorist assets and to impose on financial institutions the obligation to report suspicious transactions if linked to a terrorist activity. In April 2002, FATF also distributed "Guidelines for the detection of terrorist financing" to financial institutions, describing the main characteristics of terrorist financing.

Since the terrorist attacks of 11 September 2001, the UN regularly publishes lists of suspected terrorists and terrorist organisations whose funds must be frozen. At EU level, several Financial Sanctions (Embargo) Regulations require financial institutions to freeze the assets of listed suspected terrorists and terrorist organisations. EU Regulation n°2580/2001 dated December 27, 2001 specifies financial transactions that are prohibited for individuals, companies, entities or groups suspected of terrorism, as designated by the Council of the European Union. Banks must freeze funds and other financial assets held by these individuals, and must not make any funds available to them. The regulation also prohibits the furnishing of financial or related services (including insurance) to individuals, entities or groups targeted by financial sanctions.

As an important contribution to the effectiveness of EU financial sanctions, four European credit sector federations (FBE, ESBG, EACB and EAPB) are working together with the Commission to set up an EU consolidated database of all persons subject to financial sanctions. This on-line database will be directly accessible to all banks. It should render the fight against terrorist financing more effective by replacing the current confusing system of multiple lists published within the framework of each Embargo Regulation.

II What role for the financial industry in this area ?

Banks and financial institutions must actively contribute to combating anti-money laundering and preventing the financing of terrorism. Because of the importance of the financial system to the criminal and terrorist element in society, it is essential that banks and financial institutions play a crucial and active role in this prevention, and take advantage of their experience to prevent terrorist financing.

Internal measures have been widely taken by financial institutions to prevent most financial crime. Mechanisms have been put in place to ensure that financial institutions know their customers (systematic checking of addresses, prohibition of anonymous bank accounts, etc.). As regards the fight against the financing of terrorism, the lists of individuals, groups and entities are daily updated, to ensure that financial institutions are able to cope with their obligations resulting from the Regulation. Further, financial institutions have put in place strict authorisation procedures to evaluate the possibility or not for them to establish in countries which are or might be “grey listed”, or to enter into transactions with companies established in such countries.

Financial institutions are required to report suspicious transactions to the national authority in charge, depending on their national regime: either on objective criteria (thresholds), or on more subjective ones (e.g. France: suspicion of illegal activity) or both (e.g. UK). Criteria may thus differ from one Member State to another, which may not facilitate the duty of pan-European financial institutions. The effectiveness of industry’s role also depends on the feedback received from law enforcement.

Finally, financial institutions recruit more and more employees with relevant experience, e.g. former police officers, to help them achieve a task which has much in common with public order protection. A collaboration of the finance sector with law-makers and police bodies is therefore essential. With this regard, and as an example, the French government signed a security convention with the French banking federation in November 2003 to provide for a practical application of such co-operation.

Is it successful?

It is difficult to fully assess the success of the financial industry in defeating financial crime, although the recognised fact that criminals had to look for other ways to conceal the proceeds of their crimes constitutes a good indication of the effectiveness of measures adopted by the financial industry. Yet the costs of the requirements on industry to have effective procedures and controls are very large, and it is not easy to measure the benefits (beyond ‘successful’ deterrence) in real terms. For example, the total number of suspicious reports in the UK in 2002 was 64,000. Of that number only 12 were considered sufficiently significant for further action to be taken. The same trend can be observed in other Member States.

Conclusion

It is clear from the above that both at the worldwide and the EU level, there is a firm commitment to combat financial crime in its various forms. In particular, this commitment is in the utmost interest of the financial services industry, often targeted for misuse by criminal organisations. It broadly supports the actions of the FATF and the EU's initiatives in these areas, and is committed to it. Not only is it the health and reputation of the financial services industry which is at stake, but ultimately the ones to benefit most from a decisive fight against money laundering are the legitimate customers of the system.

The financial industry is keen to continue its co-operation with the FATF, the EU and other organisations dealing with the fight against money laundering and terrorist financing. It looks forward in particular to the forthcoming debate on the Third Anti-Money Laundering Directive.

Notes:

1. All EU Member States, EU Commission, Iceland, Norway, Switzerland, Russia, US, Canada, Mexico, Argentina, Brazil, Japan, China, Hong Kong, Singapore, Turkey, South Africa, Gulf Cooperation Council;, Australia, New Zealand