Twelve-Month Pilot Program of Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) Assessments Joint Report on the Methodology for Assessing Compliance with the FATF 40 Recommendations and the FATF 8 Special Recommendations Supplementary Information
March 16, 2004

Twelve-Month Pilot Program of Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) Assessments Joint Report on the Review of the Pilot Program
March 10, 2004

Public Information Notices

The IMF and the Fight Against Money Laundering and the Financing of Terrorism

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Public Information Notice (PIN) No. 04/33
April 2, 2004
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Executive Board Reviews and Enhances Efforts for Anti-Money Laundering and Combating the Financing of Terrorism

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On March 24, 2004 the Executive Board of the International Monetary Fund (IMF) reviewed the Twelve-Month Pilot Program of Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) Assessments jointly undertaken by the IMF and World Bank, and adopted proposals to make such assessments a regular part of Fund work. As part of the review, the Executive Board endorsed the revised 40 Recommendations of the Financial Action Task Force (FATF) as the new standard for AML/CFT Reports on the Observance of Standards and Codes (ROSCs) that will be prepared, as well as the revised methodology to assess that standard. Drawing on the positive experience under the 12-month pilot program (see Press Release No. 02/52), the Executive Board decided to expand the Fund's AML/CFT assessment and technical assistance work to cover the full scope of the expanded FATF recommendations.

Background

The 40 Recommendations on Anti-Money Laundering and the 8 Special Recommendations on Combating the Financing of Terrorism, developed by FATF (the so-called FATF 40 +8 Recommendations), were endorsed by the IMF and the World Bank in 2002 to be used as the international standard for the AML/CFT work that the Fund and Bank are jointly undertaking. During the 12-month period that ended in October 2003, the IMF and the World Bank, in collaboration with FATF and FATF-style regional bodies (FSRBs), undertook a pilot program of AML/CFT assessments of 41 jurisdictions. The assessments employed a common methodology based on the FATF 40 + 8 Recommendations. The Fund conducted 20 of the assessments, the World Bank conducted six assessments, and seven assessments were conducted jointly by the Fund and the Bank. FATF and the FSRBs conducted the remaining eight assessments. ROSCs, which summarize the findings of assessments of compliance with standards and codes of best practices, have been or will be completed for all of the pilot assessments, and, with the consent of national authorities, the ROSCs are being posted to the IMF website for public information. In parallel with the AML/CFT pilot program, the delivery of technical assistance for AML/CFT has been greatly increased. During the last two years there have been 85 country-specific technical assistance projects benefiting 63 countries, and 32 regional projects reaching more than 130 countries.

Experience with the 12-month pilot program shows that the enhanced work of the IMF and World Bank is having a positive impact on international awareness of the importance of strong AML/CFT regimes. Most jurisdictions have developed and are implementing action plans to correct shortcomings identified during the assessments.

The findings of the pilot also show that:

    · Many countries show a high level of compliance with the original FATF 40 Recommendations but compliance with the newer (2001) 8 Special Recommendations on Terrorist Financing is weaker, frequently because necessary legislation had not yet been adopted.

    · Wealthier jurisdictions generally have well developed regimes but require additional action on CFT. Middle-income jurisdictions generally have well developed legal and institutional frameworks but frequently have gaps in implementation of the regime. Many lower-income countries have put in place the essential legal elements of an AML/CFT regime but implementation remains a challenge due to insufficient resources and training.

    · Implementation weaknesses identified include: poor coordination among government agencies, ineffective law enforcement, weak supervision, inadequate systems and controls among financial firms, and shortcomings in international cooperation.

Experience under the pilot with both assessments and with technical assistance considerably deepened collaboration between the Fund/Bank and the FATF and the FSRBs, and with other international bodies involved in AML/CFT work, such as the UN Counterterrorism Committee, the UN Office on Drugs and Crime, and various donor aid organizations. Review of the pilot pointed to several areas where further operational improvements could be made and where policy evolution should be considered. These included the need for close coordination with FATF and FSRBs on the timing of assessments, more equitable sharing of the assessment burden among agencies, and broadening the responsibilities of Fund and Bank staff for the supervision and integration of assessment missions to insure comprehensive and high quality assessments. The scope of both assessments and of technical assistance will be expanded as a result of adoption of the revised FATF 40 recommendations, which call for a wider range of financial and non-financial business and professions to come under AML/CFT obligations

Executive Board Assessment

Executive Directors welcomed the opportunity to review the experience of the joint Fund/Bank program for assessments and technical assistance for Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT). They commended the Fund/Bank staffs on the overall success of the pilot program, noting that AML/CFT assessments and technical assistance have now become an important component of the Fund and the Bank's work to strengthen the integrity of financial systems and deter financial abuse.

Directors welcomed the participation by the Financial Action Task Force (FATF) and FATF-style regional bodies (FSRBs) in the pilot program. Although a full review of the quality and consistency of their reports will take place at a later date, Directors were encouraged by the initial finding that the FATF/FSRBs' assessments were prepared in accordance with the principles of the Reports on the Observance of Standards and Codes (ROSCs) and were linked to the Financial Sector Assessment Program (FSAP), and that the reports received to date were generally of good quality. They underlined the importance of coordinating the Fund/Bank's work with that of the FATF and the FSRBs to avoid duplication of assessments. Directors looked forward to receiving the full review of the quality of the FATF/FSRBs' assessments and their consistency with the ROSC principles, as well as the effectiveness of coordination efforts, in about 18 months' time.

Directors noted that the pilot program had achieved the initial objectives agreed to by the Executive Board and, in particular, that it had led to a considerable deepening of international attention to AML/CFT issues and to the provision of substantial technical assistance in this area. They were encouraged that most jurisdictions have responded positively to assessments. Directors commended the generally high level of compliance with the FATF recommendations in higher- and middle-income countries, while noting that many lower-income countries face a challenge in implementing the FATF standard owing in part to shortages of resources to devote to this purpose. While observing that there are more general weaknesses regarding compliance with the eight special recommendations on terrorist financing, Directors welcomed the increased awareness among jurisdictions of the need for strong legislative and institutional frameworks in this area.

Directors emphasized that a key element of raising global compliance with the FATF standard is the delivery of technical assistance. In this regard, they welcomed the significant and increased contribution by the Fund in the delivery of technical assistance on AML/CFT in legislative drafting, support to supervisory bodies, establishment of financial intelligence units, and training. At the same time, Directors recognized that the Fund is only one of many technical assistance providers, and emphasized the Fund's need to work closely with bilateral and other multilateral donors, while respecting their different mandates and expertise. They agreed that the delivery of technical assistance to strengthen the capacity of FSRBs to conduct assessments was a cost-effective way of strengthening the global efforts on AML/CFT.

Directors noted that the Fund/Bank had conducted the great majority of assessments during the pilot program, reflecting the late start of the FATF/FSRBs in conducting assessments during the pilot program. Further, they observed that the Fund had conducted a greater share of the assessments, in part reflecting the intensified work on Offshore Financial Centers (OFCs), in which the Bank is not involved. Looking ahead, Directors welcomed the commitment by the FATF President to ensure that the FATF takes on a more equitable sharing of the burden. They noted that the FATF and the FSRBs combined are expected to conduct assessments of 15 to 20 countries per year. They requested the staff to ensure close collaboration and coordination with the FATF/FSRBs on assessment schedules. Directors also welcomed the commitment by the Bank to share the assessment burden equally with the Fund during the transition period and later.

In view of the success of the pilot program and the importance attached to AML/CFT work, Directors agreed that it should be a regular part of the Fund's work, and that AML/CFT assessments, whether prepared by the Fund/Bank or the FATF/FSRBs, should continue to be included in all FSAP and OFC assessments. Going forward, the Executive Board endorsed the revised FATF standard that expands the scope of activities, and the revised assessment methodology for the Fund's operational work, in view of the international acceptance that the revised FATF 40+8 is the relevant standard for the preparation of the AML/CFT ROSCs. Directors, moreover, agreed on the importance of continuing collaboration with the FATF in light of its indication that it has no plans at present to conduct a further round of the Non-Cooperative Countries and Territories (NCCT) exercise. In addition, in this regard, some Directors expressed concern that the FATF had left open the possibility of further rounds of the NCCT exercise, and noted that if the FATF were to resume the NCCT exercise, the Fund would need to reconsider collaboration with the FATF, as the exercise is at odds with the uniform, voluntary, and cooperative nature of the ROSC exercise. They indicated that the suspension of the exercise should continue to be a condition for the Fund's joint work.

Directors acknowledged that some areas of the assessment process could be improved, particularly with regard to the integration of the work now carried out by the independent AML/CFT experts (IAEs) into the overall assessment process. They stressed that the need to ensure effective integration and quality control of the IAEs' work would become more pressing with the adoption of the new FATF recommendations, and therefore supported the adoption of measures to strengthen the contribution of IAEs in Fund assessments, within resource constraints.

In considering the options for advancing the Fund's work on AML/CFT, many Directors expressed a preference for continuing the status quo, as outlined under Option 1 in the staff paper, which they thought is working well and limits the staff's involvement in the assessments to those areas that they felt were within the core mandate and expertise of the Fund. They considered that extending the Fund's involvement to law enforcement issues would risk jeopardizing the cooperative nature of the Fund's relations with its members and the support of the membership for AML/CFT. These Directors also felt that the identified need to improve the work of the independent AML/CFT experts (IAEs) could be accommodated without expanding the areas of involvement of the Fund and the Bank in AML/CFT. However, the majority of the Executive Board agreed to support the Fund becoming fully accountable, together with the Bank, for AML/CFT assessments and for providing technical assistance, including in the sectors covered by IAEs, as outlined under Option 3 in the staff paper. These Directors agreed that assessing whether countries have the capacity to implement AML/CFT laws effectively is part of the core mandate of the Fund and does not contravene the prohibition of the Fund to exercise law enforcement powers. They supported a more comprehensive and integrated approach to conducting AML/CFT assessments in order to enhance the efficiency and quality of the process.

In considering Option 3, which calls for the costs of assessments to be borne by the Fund/Bank, Directors noted that there is uncertainty about the eventual cost of taking on the additional assessment and technical assistance work. In particular, they noted that developing more precise cost estimates for assessments will require practical experience with implementation of the new standard in the transition period in fiscal year 2005. Directors also noted that actual experience will help refine estimates of the resource costs. Some Directors indicated that without better estimates of the costs, it was difficult for them to assess fully the merits of the different options, and thought it appropriate to introduce a cap in the fiscal year 2005 budget for the assessments. Directors emphasized, however, that the extension of this work should not crowd out other essential activities, including ongoing technical assistance. They noted that specific redeployment and allocation of the additional resources and staff positions to undertake the expanded assessment and technical assistance work in the next year will be taken up as part of the fiscal year 2005 budget discussion. In this regard, Directors urged bilateral and multilateral donors of financing and of expert resources to support this initiative generously.

Directors indicated their interest in receiving reports on (i) the review of the quality and consistency of the FATF/FSRBs' assessments and coordination in about 18 months' time; and (ii) a comprehensive review of the overall effectiveness of the Fund/Bank program in about three years' time.





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