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.¹

¹ Ed. Note: Pursuant to Decision No. 13814-(06/98), November 15, 2006, future reviews under the above paragraph will be conducted on an "as needed" basis. The expectation going forward is that "as needed" would generally mean a lag of at least five years between any such reviews. Decision No. 14235-(09/1), December 31, 2008, provided that a review shall be completed by June 30, 2009.