## REVIEW OF THE FUND’S AML/CFT STRATEGY — EXECUTIVE SUMMARY ## Source details **Canonical URL:** [REVIEW OF THE FUND’S AML/CFT STRATEGY — EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/pp/2019/pp101718-2018-review-of-the-funds-aml-cft-strategy.pdf) ## Other formats - [Markdown version](/-/media/files/publications/pp/2019/pp101718-2018-review-of-the-funds-aml-cft-strategy.pdf.md) - [Structured JSON version](/-/media/files/publications/pp/2019/pp101718-2018-review-of-the-funds-aml-cft-strategy.pdf.json) --- ### Purpose, scope, and standards - Framing: - Money laundering (ML), related predicate crimes, terrorist financing (TF), and financing of the proliferation of weapons of mass destruction (PF) are serious threats to financial integrity and stability. - International standard: - The FATF 2012 “International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation: the FATF Recommendations” constitute the international AML/CFT standard that policies and measures should reflect. ### Fund’s role and program evolution - Historical evolution and integration: - Program evolved from assessments and capacity development (CD) to a comprehensive, multipronged program integrated into surveillance, FSAPs, Fund-supported programs, and CD. - Since 2014 Executive Board guidance, AML/CFT issues are: - raised in surveillance and Fund-supported programs when specific conditions are met; - included in a flexible way in all Financial Sector Assessment Programs (FSAPs); - covered in the Fund’s CD activities and other policy work (including governance engagement, correspondent banking relationships (CBRs), financial stability in countries with Islamic banking, and financial integrity aspects of Fintech and crypto assets). - Proposed adjustment to assessment strategy: - Shift to fewer Fund-led assessments but increase staff participation in global review and training efforts to ensure quality and consistency of AML/CFT assessments conducted by other bodies. - Expected outcome: expand the Fund’s reach and maximize impact of overall involvement in AML/CFT assessment work. - Resource implications: - A small, incremental increase in resources may be needed in the medium term. - Initial cost estimates to be included in the FY20–22 medium-term budget proposal, as warranted. ### Concluding observations - The Fund’s multipronged program, coordination with other actors, and integration of AML/CFT across core workstreams constitute an appropriate and effective approach. - Continued adherence to 2014 guidance, with the single proposed operational adjustment and modest medium-term resource increases, would maintain and enhance the Fund’s contribution to global financial integrity. *Prepared by the Legal Department in consultation with other Departments; team led by Nadim Kyriakos-Saad; coordinated by Nadine Schwarz; supervised by Yan Liu. October 17, 2018.* --- ### EFFECTIVENESS, SURVEILLANCE, AND FUND-SUPPORTED PROGRAMS ### Effectiveness of the Fund’s AML/CFT contribution - General assessment: - The Fund’s contribution has proven effective and staff are at the forefront of policy discussions related to AML/CFT, CBR, and Fintech. - The multipronged approach has helped members strengthen AML/CFT frameworks and resilience to ML, TF, PF, and other crimes by: - promoting understanding of ML/TF risks and developing prioritized policies; - enhancing effectiveness of AML/CFT frameworks and facilitating exits from FATF monitoring and re-access to financial markets; - addressing emerging issues holistically (e.g., CBRs and Fintech). ### Surveillance: criteria, application, and impact - Inclusion criteria and practice: - Under the 2012 Guidance Note, AML/CFT issues are discussed in Article IV consultations when ML, TF, and related predicate crimes may significantly influence domestic or balance of payments stability or cause external spillovers that undermine global stability. - Since 2014, staff has discussed financial integrity issues in around 40 percent of Article IV consultations, mostly on a mandatory basis. - Assessment factors for depth of discussion: - Impact on financial system stability; - Threats from predicate crimes; - Adverse impact on the broader economy; - Adverse spillover effects and impact on global stability. - Selected country examples (high-level): - Angola, Iran, Mexico, Panama, United Arab Emirates — staff provided targeted advice to strengthen AML/CFT frameworks, address CBR pressures, improve beneficial ownership transparency, and support anticorruption efforts. ### Fund-supported programs: policy, scope, and trends - Executive Board 2014 guidance: - Integrate AML/CFT when financial integrity issues are critical to financing assurances or program objectives. - Types of measures used in programs: - Legal reforms, institutional reforms, and implementation measures (e.g., risk-based supervision, targeted measures on PEPs). - Statistics on inclusion since 2014: - Thirteen Fund-supported programs, including ten ongoing and three staff-monitored programs (SMPs), included financial integrity-related measures as program conditionality (compared to six programs between 2011 and 2014). - Total of 36 Fund-supported programs included financial integrity-related measures when counting broader policy commitments. - Of the total 36, 30 involve financial support (of which 18 are ongoing) and 6 involve Fund policy support under Policy Support Instruments and Policy Coordination Instruments. - Implementation and design guidance: - Majority of measures were implemented on time; others delayed due to capacity constraints and legislative processes. - Future inclusion when measures are reasonably within members’ control and critical for program goals or necessary for specific Articles/policies; design to be tailored to member circumstances with emphasis on effectiveness. ### Examples of program support - Afghanistan, Iraq, Madagascar, Ukraine — structural benchmarks and prior actions helped address FATF monitoring, terrorism financing concerns, seizure and management of proceeds, and monitoring of PEPs, with outcomes including exits from monitoring and strengthened institutional frameworks. --- ### FSAPS, AML/CFT ASSESSMENTS, AND THE GLOBAL ASSESSMENT PROCESS ### FSAP input and differences with full assessments - FSAP inputs: - Targeted reviews focused on issues most relevant for financial sector stability; prepared by Fund and World Bank staff; result in key findings and recommendations (but not ratings). - AML/CFT assessments: - Comprehensive reviews against the FATF 40 Recommendations and 11 Immediate Outcomes; conducted by one or more assessor bodies; result in recommendations and ratings on technical compliance and effectiveness. - Historical use and alignment challenges: - All 46 FSSA reports published from March 2014 to July 2018 include AML/CFT discussion, including seven AML/CFT technical notes. - Alignment of assessment schedules and FSAP timelines has been challenging; of the 46 countries that underwent FSAPs from 2014 to July 2018, only 3 had been assessed under the current round prior to the FSAP. ### Expected trend and projections - Under current projections: - Some 90 percent of countries tentatively scheduled to undergo an FSAP by 2021 will have been assessed against the 2012 standard by the FATF, FSRBs, the Fund, or the World Bank. - Implications: - Most FSAPs are expected to include key findings based on assessments, easing AML/CFT input workload and increasing reliance on assessment reports. ### The Fund’s role in the global assessment process - Participation and leadership: - Fund led assessments of Italy, Canada, Mexico, and Colombia against the 2012 standard. - The Fund has completed four assessments against the current standard (with three currently underway or planned). - Average of one to two assessments per year (less than anticipated in 2014). - Quality assurance and training contributions: - Fund staff acted as designated external reviewer in 11 assessments, provided comments in seven post-plenary reviews, delivered ten trainings for assessors, three bilateral trainings, and one regional training. - In response to five countries’ requests, as of September 2018 staff issued AML/CFT ROSCs on the basis of final assessment reports. - Constraints: - The time-consuming nature and significant cost under the current methodology reduced the number of Fund-led assessments. ### Assessment findings and methodological implications - General trends: - Technical compliance ratings are generally higher than effectiveness ratings. - Persistent effectiveness challenges: assessing ML/TF risks, implementing risk-based approaches, transparency of beneficial ownership, implementation of targeted financial sanctions, and effective investigation/prosecution and confiscation. - Methodology and resource intensity: - Average timeframe for an assessment increased from approximately 8 months under the previous round to 12 to 14 months under the current one. - Assessors have had to devote more resources to technical compliance assessment than originally anticipated. - Quality and consistency measures introduced since 2014: - One-week assessor training minimum; two-day country training for stakeholders. - Pre-plenary external review and delegations’ review; post-plenary (ex-post) network-wide review and potential amendments prior to publication. - Despite measures, some published reports still contain deficiencies; plenary postponements occurred in five instances and eight reports were put on hold after adoption and amended prior to publication (as of September 2018). ### Proposed strategic shift - Reallocate effort: - Conduct only one to two Fund-led assessments per year (in lieu of two to three). - Devote more resources to review and training processes to strengthen quality and consistency across assessor bodies. - Continue to issue, upon request, AML/CFT ROSCs on the basis of final assessment reports following a pro forma review. --- ### CAPACITY DEVELOPMENT (CD) PROGRAM, IMPACTS, AND FINANCING ### CD program scale, modalities, and content - Scale and coverage: - Since 2002, CD provided to 118 countries through more than 385 projects across all regions. - Since 2014, TA provided to a total of 54 recipient countries in all area departments. - Delivery modalities: - HQ-based staff, short-term experts, long-term regional advisers in four regions (Africa, Asia, Middle East and Central Asia, and Latin America and the Caribbean). - Regional training centers: Singapore Training Institute; Joint Vienna Institute; Center for Economics and Finance in Kuwait; Regional Technical Assistance Center for Southern Africa. - Core modules: - Identify AML/CFT reform areas; upgrade legal and regulatory frameworks; conduct NRAs; develop national strategies; build capacity of supervisors of financial institutions and DNFBPs; improve FIU structure and tools. - Emphasis on effectiveness: - Results-based management approach and program-level log frame; monitoring and evaluation, including external evaluations for Thematic Fund phases. ### Funding and coordination - Funding sources: - Since 2009, approximately 90 percent of AML/CFT CD activities has been externally financed following the launch of a multi-donor trust fund (Thematic Fund). - New five-year phase started May 2014 and recently extended to April 2020. - Donor pledges total approximately $28 million in support. - Internal Fund resources finance about 10 percent of AML/CFT CD. - Current donors: France, Japan, Luxembourg, the Netherlands, Norway, Qatar, Saudi Arabia, Switzerland, and the United Kingdom. - Engagement criteria and coordination: - Criteria include level of ML/TF threats and vulnerabilities (e.g., FATF listing), integration with surveillance and programs, country ownership, absorption capacity, availability of resources, and complementarity. - Staff coordinates with multilateral and bilateral TA providers and stakeholders (e.g., World Bank, UN, FATF, FSRBs, Egmont Group) to avoid duplication and deepen impact. ### CD impacts and examples - Reported impacts: - Fund CD supported exits from FATF monitoring: Afghanistan, Iraq, Kuwait, Nepal, Sudan. - CD supported implementation under Fund-supported programs and surveillance (examples: Iraq, Tunisia, Ukraine; Angola, Oman, Qatar). - CD helped ease CBR pressures in Angola, Guatemala, Jamaica, and Sudan. - Independent evaluations: - Phase I evaluation (2014) concluded the program was successful; Phase II evaluation (May 2014–December 2017) is underway. - Country case outcomes: - Sudan: CD contributed to FATF removal from monitoring in October 2015 and MENAFATF removal from enhanced follow-up in April 2016; 2017 saw first sanctions by Sudanese courts for ML and Sudan joined the Egmont Group. - Ukraine: CD supported anticorruption objectives with outcomes including risk-based supervisory tools, improved inspections, increased regulatory sanctions, increased suspicious transaction reporting analyzed by a dedicated anticorruption FIU department, and increased investigation and prosecution of corruption offenses by high-level public officials. ### CD program efficiency, prioritization, and financing going forward - Staff actions to improve delivery: - Coordinate with other TA providers; leverage new technologies including online learning; adapt staff expertise to emerging issues (CBRs, governance and corruption, Fintech, PF). - Financing model: - Combination of external and internal financing has met member demand to a reasonable extent. - Financing model may need re-evaluation in the medium term and will be considered in the context of Phase III of the AML/CFT Fund to be launched in 2020. - Emerging issues: - Emerging issues may generate additional demand though magnitude is currently too early to quantify. --- ### GLOBAL POLICY ENGAGEMENT, CONVENING ROLE, AND RESOURCE OUTLOOK ### Global policy engagement and broader integration - Contributions: - Staff provide input to FATF and FSRBs, G20, FSB, and other standard setters; participate in international dialogue, review policy documents, and publish on specific topics. - Integration into broader Fund work: - AML/CFT considerations incorporated into Fintech, governance and corruption, CBRs, Islamic financing, and economic citizenship policy work. - Examples: - Fintech: Regtech/SupTech opportunities and crypto-asset threats; IMF Staff Discussion Note (2017) referenced; Bali Fintech Agenda engagement; crypto-asset issues addressed in surveillance and FSAPs when systemic or requested (example: 2018 staff report for the Republic of the Marshall Islands). - CBRs: ML/TF concerns and compliance costs drive pressures; strengthening AML/CFT frameworks and banks’ risk management can alleviate pressures. - Economic Citizenship Programs: ECPs can be misused by criminals; staff advised on AML/CFT measures to mitigate misuse. ### Convening role and regional initiatives on correspondent banking - Use of convening power: - Events at Annual and Spring Meetings, workshops, seminars, panels, and region-specific initiatives to discuss CBRs and Fintech. - Regional CBR initiatives (high-level): - Caribbean roundtables (Barbados February 2017; Jamaica November 2017), Pacific roundtables (Sydney and Auckland February 2018), Sub-Saharan Africa seminars and workshops (October 2017; May 2018), Arab Region workshops (October 2015; September 2017), Caucasus and Central Asia workshop (April 2018). ### Resources, staffing, and future resourcing needs - Current staffing and funding: - AML/CFT work undertaken by the Legal Department with lawyers, financial sector experts, research officers, and support staff. - Since 2014, eight limited-term and contractual positions reclassified to Term staff positions (2015) and three additional Fund-financed positions added to Legal Department’s structural budget. - Demand outlook and recommendation: - Demand for financial integrity work is expected to increase due to the fourth assessment round and emerging issues, notably Fintech-related risks. - A small, incremental increase in resources in the medium term may be needed; any additional resources to be allocated across workstreams following a risk-based approach. - Initial cost estimates to be included in the FY20–22 medium-term budget proposal, as warranted. ### Conclusion and recommendations - Strategic direction: - Overall strategic direction remains appropriate: risk-based approach and synergies among workstreams have kept the Fund at the forefront of ML/TF and financial integrity challenges. - Operational proposal: - Conduct one to two Fund-led assessments per year (instead of two to three), increase participation in review and training processes, and continue issuing, upon request, AML/CFT ROSCs based on final assessment reports following a pro forma review. - Issues posed to Directors: - Support for approach to address financial integrity in surveillance and Fund-supported programs (paragraphs 20 and 24)? - Agreement to maintain 2014 policy on FSAPs (paragraph 32)? - Agreement with proposed assessment and review/training reallocation and continuation of ROSC issuance (paragraph 43)? - Agreement with overall approach to AML/CFT CD delivery (paragraph 52)? - Agreement that staff should continue addressing financial integrity concerns in emerging issues, including Fintech (paragraph 56)? *Source: pp101718-2018-review-of-the-funds-aml-cft-strategy (provided content).* ### EXECUTIVE SUMMARY ### REVIEW OF THE FUND’S AML/CFT STRATEGY — EXECUTIVE SUMMARY ### Purpose and scope - Safeguarding financial integrity is a priority for the international community, including the Fund. - The Executive Summary frames money laundering (ML), related predicate crimes, terrorist financing (TF), and the financing of the proliferation of weapons of mass destruction (PF) as serious threats to the integrity and stability of members’ financial sectors and to external and international financial stability. - The FATF 2012 “International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation: the FATF Recommendations” constitute the international AML/CFT standard that these policies and measures should reflect. ### Fund’s role and evolution - For close to two decades, the Fund has contributed significantly to global financial integrity efforts. - The Fund’s AML/CFT program evolved from a modest effort focused mainly on assessments and capacity development (CD) to a comprehensive, multipronged program integrated into the Fund’s core activities. - In line with Executive Board guidance in 2014, AML/CFT issues are: - raised in surveillance and Fund-supported programs when specific conditions are met; - included in a flexible way in all Financial Sector Assessment Programs (FSAPs); - covered in the Fund’s CD activities, including AML/CFT assessments, and in other policy work. - AML/CFT and financial integrity issues have been increasingly integrated into other Fund initiatives, including governance engagement (April 2018), work on correspondent banking relationships (CBRs), financial stability in countries with Islamic banking, and the financial integrity aspects of Fintech and crypto assets (including the Bali Fintech Agenda). ### Program effectiveness and activities - Over the last four years, the Fund’s AML/CFT program has proven effective, including in addressing emerging risks. - The multipronged program has enabled the Fund to address ML, TF, PF, and broader financial integrity-related issues and emerging issues such as: - correspondent banking relationships (CBRs); - financial technology—Fintech, including crypto assets. - The program has assisted member countries in strengthening their AML/CFT frameworks and increasing their resilience to ML, TF, PF, and other crimes. ### Global architecture and coordination - The Fund is an important actor within a global AML/CFT architecture that includes: - the Financial Action Task Force (FATF, the AML/CFT standard setter); - nine FATF-Style Regional Bodies (FSRBs); - the World Bank; - a range of other international and regional bodies (UN agencies, Egmont Group, etc.). - Staff actively coordinates policy and CD activities with other international and regional organizations to maximize impact and avoid duplication. - Coordination mechanisms include participation in FATF discussions, contribution to the UN global counter-terrorism strategy, engagement through FATF/FSRB forums for TA coordination, UN CTITF for CFT-focused TA synergies, and the FSB forum for CBR-related CD activities. - Staff leverages others’ assessment work (FATF, FSRBs, World Bank) for surveillance and FSAPs and participates directly in global assessment efforts by leading some FATF/FSRB member assessments and reviewing draft assessment reports. ### Assessment approach and recommended adjustment - The directions given by the Executive Board during the 2014 review remain appropriate and should continue to guide the Fund’s work within current budgetary constraints. - One proposed adjustment: - shift to fewer Fund-led assessments but increase staff participation in global review and training efforts to ensure the quality and consistency of AML/CFT assessments conducted by other bodies; - expected outcome: expand the Fund’s reach and maximize the impact of its overall involvement in AML/CFT assessment work. - Resource implications: - a small, incremental increase in resources may be needed in the medium term to address the membership’s increasing needs for Fund engagement in AML/CFT and financial integrity across all workstreams. - Initial cost estimates will be included in the FY20–22 medium-term budget proposal, as warranted. ### Concluding observations - AML/CFT policies and measures are key to protecting the integrity and stability of financial markets and the global financial system. - The Fund’s multipronged program, coordination with other actors, and integration of AML/CFT across surveillance, FSAPs, Fund-supported programs, and CD constitute an appropriate and effective approach. - Continued adherence to the 2014 guidance, with the single proposed operational adjustment and modest medium-term resource increases as needed, would enable the Fund to maintain and enhance its contribution to global financial integrity. *Prepared by the Legal Department in consultation with other Departments; team led by Nadim Kyriakos-Saad; coordinated by Nadine Schwarz; supervised by Yan Liu. October 17, 2018.* ### 8. The Fund’s contribution to safeguarding financial integrity has proven effective. The ### 8. The Fund’s contribution to safeguarding financial integrity has proven effective. ### Effectiveness of the Fund’s AML/CFT contribution - The Fund has made important contributions to the global financial integrity policy agenda and staff are at the forefront of policy discussions related to AML/CFT, CBR, and Fintech. - The multipronged approach has enabled the Fund to address financial integrity issues and greatly contributed to members’ efforts to strengthen their AML/CFT frameworks by: - promoting and deepening members’ understanding of ML/TF risks and developing prioritized policies to mitigate those risks; - contributing to members’ efforts in enhancing the effectiveness of their AML/CFT frameworks and, in some cases, exiting from FATF monitoring and re-accessing financial markets; - addressing emerging issues in a holistic manner (e.g., CBRs and Fintech). ### Continued importance and evolving threats - ML, predicate crimes, TF, and PF still pose a significant and evolving threat to the financial integrity of countries’ financial sectors and the international financial system. - Recent financial integrity-related scandals (for example, the Panama Papers and the Paradise Papers) and new risks associated with some aspects of Fintech underscore that more needs to be done and that the Fund continues to have an important role to play in the global AML/CFT architecture. ### Strategy relevance and policy realignment - The AML/CFT strategy endorsed by the Executive Board in 2014 remains appropriate, but a slight modification to maximize the impact of the Fund’s overall involvement in AML/CFT assessment work would be useful. - AML/CFT assessments are a key source of information for the Fund’s work on financial integrity issues; ensuring the quality and consistency of AML/CFT assessment reports throughout the global network is crucial. - Correct application of the assessment methodology remains a challenge for many assessor bodies; as a result, some published reports do not meet the required level of quality and consistency. - In practice, staff conducted one to two AML/CFT assessments per year (two to three were envisaged under the current policy) and participated to a greater extent in the review of the quality and consistency of other assessor bodies’ reports and dedicated more resources to the training of FATF and FSRB assessors. - A realignment of the policy (and its focus on assessments rather than quality and consistency efforts) with current practice would enable the Fund to expand its reach and maximize the impact of its overall involvement in AML/CFT assessment work. - The current funding model for the Fund’s AML/CFT CD program may need to be re-evaluated in the medium term, following the review of the Fund’s overall CD strategy, to ensure continued alignment, appropriateness, sufficiency, and sustainability. - A small, incremental increase in resources may also be needed in the medium term to enable the AML/CFT program to continue to meet the membership’s increasing demand for financial integrity work. ### Scope and evolution of the Fund’s approach - The Fund’s work has expanded from AML to include CFT, combating PF, and broader financial integrity-related issues. - The program originally focused mainly on assessments of countries’ AML/CFT frameworks against the FATF standard and TA. - Since 2001, the Fund has endeavored to ensure appropriate coverage of AML/CFT issues in the context of Fund surveillance. - Following the Executive Board’s 2011 guidance and the 2012 Guidance Note, ML, TF, and related predicate crimes issues have been raised increasingly and more systematically in the context of surveillance. - The 2014 Board endorsement of the FATF 2012 standard expanded scope to include specific measures to fight PF. - The Fund has relied on measures not specifically mandated by the FATF standard (for example, establishing anticorruption agencies and introducing asset declarations) to implement the objective of safeguarding financial integrity. - AML/CFT issues are also addressed under the framework for enhanced Fund engagement on governance issues adopted in April 2018 (the 2018 enhanced governance framework), where AML/CFT is recognized as one of the six state functions most relevant to economic activity and a critical tool in addressing corruption. ### Surveillance: criteria, application, and impact - Under the 2012 Guidance Note, AML/CFT issues should be discussed in the context of Article IV consultations in cases where ML, TF, and related predicate crimes may significantly influence a member’s present or prospective domestic or balance of payments stability or may give rise to external spillovers that undermine global stability. - AML/CFT issues may also be discussed in surveillance on a voluntary basis. - Inclusion of financial integrity issues in surveillance has been applied in an even-handed manner consistent with the Integrated Surveillance Decision (ISD) and the 2015 Guidance Note for Surveillance Under Article IV Consultations. - Staff assesses whether to discuss financial integrity issues and modulates the depth of discussion according to country circumstances by evaluating: - the impact on the stability of a country’s financial system; - threats to financial sector stability arising from predicate crimes; - adverse impact on the stability of the broader economy; - adverse spillover effects and impact on global stability. - Since 2014, staff has discussed financial integrity issues in around 40 percent of Article IV consultations, mostly on a mandatory basis. - These discussions assisted members in identifying financial integrity risks, developing prioritized AML/CFT and related policies to mitigate them, and addressing emerging issues (for example, CBRs and Fintech). ### Selected cases of AML/CFT inclusion in Article IV consultations (high-level examples from Box 2) - Angola: Staff reports highlighted the importance of addressing AML/CFT issues to deal with pressures on CBRs after the loss of all direct U.S. dollar CBRs in October 2016; recommended strengthening AML/CFT framework and risk-based supervision to address corruption-related risks and better position for the next evaluation and to prevent a FATF listing. - Iran: AML/CFT issues discussed since 2006; in 2014 and successive Article IV reports staff urged strengthening the AML/CFT framework to facilitate re-integration into the global economy, reconnecting to CBRs, reducing the size of the informal sector, and better detecting proceeds of corruption and tax evasion; Iran joined the Eurasia Group as an observer in 2017 and is implementing an action plan agreed with the FATF. - Mexico: Staff acknowledged authorities’ efforts in tackling corruption and ML and advised further strengthening AML tools to support anticorruption efforts and improve governance, including increasing transparency of companies and enhancing due diligence on PEPs and companies linked to the public sector. - Panama: Staff urged strengthening the AML/CFT framework and highlighted possible economic impact of FATF and Global Forum initiatives; recommended priority actions including making tax crimes a predicate offense to ML and effectively implementing relevant measures. *Source: pp101718-2018-review-of-the-funds-aml-cft-strategy* ### Box 2. Selected Cases of AML/CFT Inclusion in Article IV Consultations (concluded) ### Box 2. Selected Cases of AML/CFT Inclusion in Article IV Consultations (concluded) ### Case examples and country-specific findings - United Arab Emirates: - Open economy and geographic location, increased flows from abroad channeled to the banking and financial sector, real estate, and gold market identified as factors creating potential vulnerabilities to the UAE’s financial integrity. - Staff recommended strengthening the effectiveness of the AML/CFT framework to mitigate these risks. - Policy advice highlighted the need to improve the understanding of ML/TF risks, including those related to the origins of financial flows, to further refine identification of beneficial owners of deposits and loans, and to enhance compliance of financial and non-financial businesses and professions (e.g., lawyers, accountants, and real estate agents) with AML/CFT requirements. ### Range of identified risks (paragraph 18) - High ML/TF threats coupled with a weak AML/CFT system leading to the likelihood of a country being disconnected from the international financial system (e.g., in the case of FATF listing, CBR withdrawal, or bilateral sanctions). - Macro-critical crimes that generate a significant amount of proceeds (such as corruption, tax evasion, or drug trafficking). - Lack of transparency and unavailability of beneficial ownership of legal persons and arrangements information (e.g., as highlighted in allegations following the Panama Papers and the Paradise Papers). - Significant levels of criminal proceeds or “hot money” (both cross-border and domestic) flowing into and out of individual financial institutions in destabilizing ways. - FATF monitoring context: - As of October 2018, the FATF had reviewed over 80 countries and publicly identified 68 of them. Of these 68, 55 had made the necessary reforms and were removed from the process. ### Policy advice priorities and modalities (paragraph 19) - Staff prioritized concrete, actionable reforms tailored to members’ risks and context, focusing on enhancing effectiveness of the AML/CFT framework: - Risk-based supervision of banks, nonbank financial institutions, and designated non-financial businesses and professions (DNFBPs) (e.g., lawyers, accountants, trust and company service providers). - Bolstering the role of financial intelligence units (FIUs). - Enhancing transparency and availability of beneficial ownership information of legal persons and arrangements. - Enhancing international cooperation. - Obtaining convictions of money launderers and confiscating ill-gotten proceeds. - When issues related to proceeds of corruption, tailored measures included: - Criminalization of corruption offenses in line with the United Nations Convention against Corruption. - Publication of comprehensive asset declarations of senior public officials. - Establishment of independent anticorruption institutions. - Modalities of engagement varied by significance of AML/CFT issues, from participation in missions to HQ-based support. ### Surveillance and Article IV consultations going forward (paragraph 20) - Financial integrity issues should continue to be discussed in Article IV consultations as previously described. - Criteria for mandatory inclusion of AML/CFT issues in Article IV consultations outlined in the 2012 Guidance Note remain appropriate and in line with the ISD. - Staff will exercise judgement and flexibility in applying engagement criteria; coverage remains based on ongoing analysis of member countries’ economic developments from a financial integrity perspective. - Discussions to be even-handed and consistent with the 2018 enhanced governance framework. - When corruption is diagnosed as severe, AML advice will be provided alongside broader governance advice. - On a voluntary basis in bilateral surveillance, staff will assess whether: - (i) members criminalize and prosecute the bribery of foreign public officials; and - (ii) members have an effective AML/CFT system designed to prevent foreign officials from concealing proceeds of corruption. ### Fund-supported programs: policy, scope, and trends (paragraphs 21–24) - Executive Board 2014 guidance: integrate AML/CFT issues into Fund-supported programs when financial integrity issues are critical to financing assurances or to achieve program objectives. - Inclusion rationale: help achieve program objectives by tackling corruption, addressing tax crimes to improve revenue collection, facilitating access to the international financial system, and combating TF. - Types of measures included in Fund-supported programs: - Legal reforms (e.g., upgrading AML/CFT legal and regulatory frameworks). - Institutional reforms (e.g., setting up anticorruption bodies, strengthening AML/CFT supervisors). - Implementation measures (e.g., risk-based AML/CFT supervision, targeted measures on PEPs). - Statistics on inclusion since the 2014 review: - Thirteen Fund-supported programs, including ten ongoing and three staff-monitored programs (SMPs), included financial integrity-related measures as program conditionality (compared to six programs between 2011 and 2014). - Total of 36 Fund-supported programs included financial integrity-related measures when counting broader policy commitments. - Of the total 36, 30 involve financial support (of which 18 are ongoing) and 6 involve Fund policy support under Policy Support Instruments and Policy Coordination Instruments. - Implementation: - Majority of measures were implemented on time; others were delayed or rescheduled due to capacity constraints, lengthy legislative processes, and domestic coordination difficulties. - Future inclusion guidance: - AML/CFT measures should be included when reasonably within the member’s direct or indirect control and either (i) critical for achieving program goals or monitoring implementation, or (ii) necessary for implementing specific Articles or policies. - Design of measures (sequencing and pace) to be tailored to members’ circumstances, including capacity constraints. - Growing need for measures aimed at improving effectiveness (not just legal/regulatory frameworks), given FATF assessment focus since 2013. - Staff will seek synergies between Fund-supported programs, surveillance, and capacity development. ### Examples of Fund-supported programs with AML/CFT conditionality (Box 3 highlights) - Afghanistan: - Persistent violence, drug trafficking, corruption, and weak AML/CFT framework; FATF public listing in 2012. - SMP approved in 2015 included a structural benchmark (SB) on establishing a regulatory framework for monitoring cross-border transportation of cash. - Implementation facilitated Afghanistan’s exit from FATF monitoring in June 2017. - Subsequent ECF arrangement (approved July 2016) included SBs to tackle corruption, strengthening criminalization of corruption and asset declaration frameworks. - Iraq: - ISIS threat; disrupting ISIS funding via robust AML/CFT framework considered key. - SBA approved in 2016 included an SB on adoption of a by-law to comply with relevant UNSC resolutions related to terrorism and TF in line with FATF Recommendations; implemented on time. - Authorities committed to measures including strengthening AML/CFT agencies, conducting risk-based inspections, and monitoring cross-border cash transportation; implementation facilitated Iraq’s exit from FATF’s review. - Madagascar: - ECF arrangement approved 2016 amid pervasive corruption affecting regulatory and budgetary policies. - SB included to strengthen AML/CFT framework on collection, administration, and management of seized assets from corruption, embezzlement, ML/TF, or organized international criminal activities. - These measures complemented fiscal governance and anticorruption reforms to enhance economic governance and fight corruption. - Ukraine: - Pervasive corruption and poor governance weighed on the economy. - SBA (approved 2014) and subsequent Extended Fund Facility included SBs and prior actions to ensure financial institutions appropriately monitor accounts of domestic PEPs and require publication of comprehensive asset declarations by PEPs. - Measures, plus conditionality on establishing dedicated institutions to investigate, prosecute, and adjudicate corruption and laundering of proceeds, have been helping detect and deter illegal proceeds from corruption. ### Financial Sector Assessment Program (FSAP) input on AML/CFT (paragraphs 25–26) - Current Fund policy: - Timely and accurate input of AML/CFT information into every FSAP is required. - FSAPs mandatory for jurisdictions with systemically important financial sectors under Article IV bilateral surveillance; voluntary for other jurisdictions. - Inclusion intended to incorporate financial integrity into broader financial sector reform efforts. - Policy evolution: - Prior to March 2014, FSAP policy included a mandatory link between FSAPs and full AML/CFT assessments. - In 2014, following Executive Board guidance, AML/CFT input remained mandatory but became flexible in scope. - Assessment basis: - Where possible, input should be based on an AML/CFT assessment against the prevailing standard finalized prior to the FSAP. - If unavailable, staff may derive key findings from other relevant sources (e.g., previous AML/CFT assessment reports, FATF/FSRB follow-up and other reports, Fund reports, authorities’ reports including NRAs, authorities’ questionnaire responses). - Targeted reassessments: - Targeted reassessments are scheduled to take place five years following adoption of the comprehensive assessment against the 2012 standard. - The first targeted reassessment is scheduled for late 2019. - Practice since March 2014: - Staff provided AML/CFT updates in all FSAPs and used flexibility in depth and scope. - Early consultation between FSAP teams and authorities helped identify main risks and narrow scope for focused discussions and targeted recommendations. - Where an assessment against the 2012 standard was available, key findings were derived from that assessment and reflected in the FSSA report. - Where assessment was absent, staff sought authority information on selected AML/CFT issues based on available information; scope varied with risk level and took forms such as technical notes, annexes, background notes to the aide memoire, and/or paragraphs in the FSSA report. - Operational note: - Most AML/CFT discussions in joint FSAPs are currently led by Fund staff; World Bank staff have contributed to AML/CFT inputs in several joint FSAPs but have been unable to contribute to more recent FSAPs due to resource constraints. *Source: Box 2. Selected Cases of AML/CFT Inclusion in Article IV Consultations (concluded), Review of the Fund’s AML/CFT Strategy.* ### 27. AML/CFT assessments and AML/CFT updates for the purposes of the FSAP differ in ### 27. AML/CFT assessments and AML/CFT updates for the purposes of the FSAP differ in scope, modalities, and output ### Differences in scope, modality, and output - AML/CFT assessments: - Include a comprehensive review of the country’s AML/CFT framework against the FATF 40 Recommendations and 11 Immediate Outcomes on effectiveness. - Are conducted by one or more of the AML/CFT assessor bodies (the Fund, World Bank, FATF, and nine FSRBs). - Result in recommendations and ratings on technical compliance and effectiveness. - AML/CFT inputs into the FSAP: - Take the form of targeted reviews focused on a few issues of greater relevance for the financial sector and its stability. - Are prepared by Fund and World Bank staff. - Result in key findings and recommendations (but not ratings). - Interaction with other assessment frameworks: - Relevant updates were also provided in the context of assessments against the Basel Core Principles for Effective Banking Supervision (BCP), particularly BCP 29 (the principle on the abuse of financial services). ### Historical use in FSAPs and evidence base - All 46 FSSA reports published from March 2014 to July 2018 include a discussion of AML/CFT, including seven published AML/CFT technical notes. - Owing to the initial phase of comprehensive assessments under the current round, most AML/CFT updates in FSAPs have been based on sources other than assessment reports (e.g., authorities’ responses to questionnaires, NRAs, and information from Article IV reports or program reviews). - Alignment difficulties: - The alignment of assessment schedules and FSAP timelines has been challenging because assessments operate under different and longer planning horizons than FSAPs. - At the beginning of the implementation of the current policy, few countries had been assessed against the 2012 standard; of the 46 countries that underwent FSAPs from 2014 to July 2018, only 3 had been assessed under the current round prior to the FSAP. - Example country practices: - Key findings in some FSAPs were extracted from FATF mutual evaluation reports (e.g., Norway, U.K., Spain) and reflected in FSSA or updated in subsequent FSAP/Article IV work. ### Expected trend and projections - Greater reliance on assessment reports is expected moving forward as the current assessment round advances. - The trend observed so far is starting to reverse as additional countries undergo AML/CFT assessments against the 2012 standard and several more assessments are planned over the coming years. - Under current projections, some 90 percent of countries tentatively scheduled to undergo an FSAP by 2021 will have been assessed against the 2012 standard by the FATF, FSRBs, the Fund, or the World Bank. - Implications: - As the current round progresses, most FSAPs are expected to include key findings based on assessments—supplemented, if necessary, with more up-to-date information. - This is expected to ease the workload related to the AML/CFT input and increase reliance on the findings of assessment reports in FSAPs. ### Key AML/CFT issues addressed in FSAPs (April 2014–July 2018) - Most frequently identified issues: - Preventive measures (e.g., customer due diligence measures, including for PEPs) - National Risk Assessment - Risk-based AML/CFT supervision - Other issues discussed depending on country circumstances: - TF and targeted financial sanctions - Suspicious transaction reporting - Supervision of DNFBPs - Effectiveness of sanctions for breaches of compliance - Effectiveness in the use of financial intelligence - International cooperation and mutual legal assistance matters - Increased discussion since 2016 of entity transparency and beneficial ownership of legal persons and arrangements under the 2012 standard ### Complementarity with Article IV consultations - FSAP and Article IV workstreams are complementary: - AML/CFT findings in FSAPs inform subsequent Article IV consultations, especially for mandatory FSAPs (conducted every five years). - Article IV consultations are a source of AML/CFT information for FSAPs when a full assessment against the standard is unavailable. - Resulting synergies: - Broad alignment between key financial integrity issues and risks identified in FSAPs and Article IV consultations. - Increased focus on entity transparency and beneficial ownership provides additional opportunities for synergy. ### Policy stance and operational guidance going forward - Maintain current policy of timely and accurate AML/CFT input into every FSAP: - The current policy has generated more targeted discussions and ensured useful updates without unnecessary duplication of assessment efforts. - Inclusion of AML/CFT analysis and recommendations in FSAPs has contributed to discussions of financial sector stability and advanced global understanding of the international AML/CFT standard. - Operational expectations: - As assessments progress, workload related to AML/CFT input into FSAPs is expected to decline because staff will increase reliance on published assessment reports (subject to updates reflecting subsequent developments). - Staff will continue to enhance understanding of ML/TF risks through development of ML/TF risk assessment tools, access to national risk assessments, and analysis of ML/TF trends, financial flows, and interconnectedness. ### Capacity development and the Fund’s role in assessments - The Fund helps members build and strengthen AML/CFT capacities through assessments against the AML/CFT standard and provision of CD services. - AML/CFT assessments remain an important component of the Fund’s work program: - During the 2014 review, Directors reaffirmed that AML/CFT assessments are an important part of the ROSC and FSAP work and stressed the importance of adequate, quality assessment reports across the twelve assessor bodies. - Directors considered it appropriate for staff to reduce the number of Fund-led assessments from six to seven to two to three per year, in light of resource implications. - Framework to strengthen quality and consistency of assessments (measures introduced since 2014): - Training for assessors: one-week assessor training as a minimum requirement. - Country training: two-day training for public and private sector stakeholders to prepare for assessment. - Pre-plenary reviews: - External review: three to four external reviewers conduct in-depth review of draft scoping notes and early draft reports; reviewers’ comments are shared prior to plenary. - Delegations’ review: draft reports are circulated to all delegations for comment; five to seven key issues selected for plenary discussion. - Post-plenary (ex-post) review: adopted reports circulated network-wide for final quality and consistency check; if two or more delegations raise the same issue, the report may be amended prior to publication. - Assessment coverage and mutual recognition: - The current round of assessments against the 2012 standard began in 2014 and is underway for all 12 assessor bodies. - The assessment methodology includes assessment of technical compliance and of effectiveness (11 Immediate Outcomes), with a main focus on effectiveness. - Pursuant to longstanding agreement, the global assessment burden is divided among the Fund, World Bank, FATF, and FSRBs; assessment reports prepared under the common methodology are mutually recognized. - The Fund focuses its assessments primarily on countries with systemically or regionally important financial sectors or facing high ML/TF risks. - As of September 2018, 55 assessments have been completed and published, including four by the Fund. ### Resource and methodological implications - The current assessment methodology improves analysis but increases complexity and resource intensity: - Assessments pay greater attention to country-specific ML/TF risks and context and provide more focused discussions. - The average timeframe for an assessment has increased from approximately 8 months under the previous round to 12 to 14 months under the current one to: - Allow countries time to gather and submit information and for assessors to analyze material. - Enable a post-plenary review of assessment reports. - Assessors have had to devote more resources to the assessment of technical compliance than originally anticipated. *Source: pp101718-2018-review-of-the-funds-aml-cft-strategy (sections 27–36, and related paragraphs).* ### 38. The Fund has played an active role in the global assessment process. In recognition of ### 38. The Fund has played an active role in the global assessment process. In recognition of the criticality of assessments to global AML/CFT efforts and to the Fund’s work on financial integrity, the Fund has actively contributed to the assessment process by leading assessments, participating in the review of the quality and consistency of other assessor bodies’ draft reports, and providing training. ### Role in the global assessment process - Fund participation and leadership: - Staff participated on an exceptional basis in the first five pilot assessments conducted by the FATF and the APG against the 2012 standard. - The Fund led the assessments of Italy, Canada, Mexico, and Colombia against the 2012 standard. - The Fund has completed four assessments against the current standard (with three currently underway or planned). - This constitutes an average of one to two assessments per year, which is less than anticipated in 2014. - Quality assurance and training contributions: - Staff dedicated larger resources than originally planned to the review process and to pre-assessment trainings. - Fund staff participated as designated external reviewer in 11 assessments and provided comments in the context of seven post-plenary reviews. - Staff was involved in the delivery of ten trainings for assessors, three bilateral trainings, and one regional training for countries to be assessed. - In response to five countries’ requests, as of September 2018 staff issued AML/CFT ROSCs on the basis of final assessment reports. - Constraints noted: - Time-consuming nature and significant cost of assessments under the current methodology reduced the number of Fund-led assessments. ### Assessment findings: technical compliance vs. effectiveness - General trends: - Technical compliance ratings are generally higher than effectiveness ratings. - Countries have made progress in bringing laws and regulations in line with the standard, but implementation is less effective in mitigating ML/TF risks. - Technical compliance strengths and weaknesses: - Relative strengths: requirements related to financial secrecy, reporting of suspicious transactions, FIUs, and the framework for mutual legal assistance. - Persistent challenges: targeted financial sanctions, transparency of beneficial ownership (BO), and DNFBPs. - Effectiveness challenges: - Many countries struggle with assessing their specific ML/TF risks and implementing a risk-based approach. - Difficulties in ensuring adequate transparency over beneficial ownership of legal persons and arrangements. - Challenges in implementing targeted financial sanctions related to TF and PF. - Several countries struggle with effective investigation and prosecution of ML activities and sanctioning of offenders. - Reference to consolidated ratings: - A consolidated overview of technical compliance and effectiveness ratings of jurisdictions assessed to date is available (URL included in source). ### Role of assessments in policy and Fund workstreams - Utility of assessment reports: - Reports identify key findings and list prioritized actions for countries to address technical deficiencies and improve effectiveness. - Reports guide post-assessment follow-up and assist Fund staff in identifying needs for Fund policy advice and capacity development (CD). - Implications of low effectiveness ratings: - Countries with multiple low ratings may meet FATF criteria for monitoring and public listing, affecting access to financial markets. - Low ratings can generate a need for Fund advice and assistance, including addressing CBR pressures highlighted in surveillance and through CD. - Deficiencies in effectiveness are driving demand for AML/CFT CD; staff response is outlined in subsequent sections. ### Quality and consistency of assessments - Improvements and ongoing challenges: - Frameworks to ensure quality and consistency are being implemented: most assessors have undergone necessary training and most countries requested pre-assessment training. - Pre-plenary reviews and the new external review detect early-stage quality/consistency issues; in most instances these are addressed prior to plenary. - Plenary postponements have occurred when issues required major report changes; to date this has occurred in five instances. - Post-plenary review has resulted in eight reports being put on hold after adoption and amended prior to publication (as of September 2018). - Some published reports still contain deficiencies despite measures in place. - Capacity-building and longer-term solutions: - Longer-term solutions are being discussed at the FATF, including sharing assessment best practices. - There is no formal test at the end of assessors’ training; typically assessor bodies select participants deemed ready to conduct assessments. - All Fund assessors have undergone the training, with limited exceptions for assessors who participated in the design of the current methodology. ### Moving forward: Fund contributions and proposed approach - Strategic shift in resource allocation: - With most Fund members now part of the FATF network, there is less need for the Fund to lead two to three assessments per year as in 2014. - Greater need to devote efforts to strengthening the quality and consistency of assessments across assessor bodies. - To maximize contribution while maintaining current budgetary envelope and given methodology challenges, staff devoted more resources to review of other assessor bodies’ reports and pre-assessment trainings. - Proposed approaches: - Devote more resources to the review and training processes. - Conduct only one to two Fund-led assessments per year. - Continue to issue, upon request, AML/CFT ROSCs on the basis of final assessment reports following a pro forma review, in line with 2014 Board guidance. ### B. The Fund’s AML/CFT CD Program — overview and modalities - Program scale and coverage: - Since 2002, the Fund has provided CD on AML/CFT and related issues to 118 countries through more than 385 projects across all regions. - Since 2014, TA has been provided to a total of 54 recipient countries in all area departments. - CD projects are typically long term (i.e., two to three years), deep, and focused, with a sequenced approach for meaningful, measurable, and sustainable results. - Delivery modalities: - Delivered by HQ-based staff and a cadre of short-term experts together with long-term regional advisers located in four regions (Africa, Asia, Middle East and Central Asia, and Latin America and the Caribbean). - Alternative delivery modes used when onsite visits were not possible (e.g., alternative locations and teleconferencing). - Regular and diverse training tailored to regional needs delivered through regional training centers (Singapore Training Institute; Joint Vienna Institute; Center for Economics and Finance in Kuwait; Regional Technical Assistance Center for Southern Africa). - Staff engaged in research projects to upgrade TA modules and keep them relevant (examples include transparency of legal persons and effectiveness of counter terrorism financing frameworks). ### CD program content, evolution, and funding - Core modules and objectives: - Modules assist members in: (i) identifying key AML/CFT areas for reform; (ii) upgrading legislative and regulatory framework in line with FATF standard; (iii) conducting NRAs to improve understanding of ML/TF risks; (iv) developing national strategies; (v) building capacity of AML/CFT supervisors of financial institutions and DNFBPs; and (vi) improving FIU structure and tools. - Greater emphasis on CD effectiveness via the Fund’s results-based management approach and a program-level log frame for AML/CFT CD. - Monitoring and evaluation are key components (donor-mandated evaluations, peer review processes, post-training feedback). The common evaluation framework for the AML/CFT Thematic Fund requires external evaluation of delivery for every phase. - Demand drivers and responsiveness: - CD demand increased over the past four years due to the 2012 revisions of the AML/CFT standard and the 2013 assessment methodology focus on effectiveness. - Pressures on CBRs, regulatory and enforcement changes, and macroeconomic risks from proceeds of corruption and tax evasion increased countries’ AML/CFT reform efforts. - Funding sources and scale: - Since 2009, approximately 90 percent of AML/CFT CD activities has been externally financed following the launch of a multi-donor trust fund (now renamed as Thematic Fund). - A new five-year phase of the Thematic Fund started in May 2014 and was recently extended to April 2020. - Donor pledges total approximately $28 million in support. - Internal Fund resources finance about 10 percent of AML/CFT CD to support Fund-supported programs or where urgent CD is needed (e.g., significant risk of CBR withdrawal). - Current donors listed in source: France, Japan, Luxembourg, the Netherlands, Norway, Qatar, Saudi Arabia, Switzerland, and the United Kingdom. - Criteria and coordination: - CD engagement criteria include: level of ML/TF threats and AML/CFT framework vulnerabilities (e.g., FATF listing); integration with surveillance and programs; country ownership and absorption capacity; availability of resources; complementarity and avoidance of duplication. - Staff coordinates with multilateral (e.g., World Bank, UN) and bilateral (e.g., Australia, United States) TA providers, and stakeholders (e.g., FATF, FSRBs, Egmont Group) to avoid duplication and deepen impact. ### CD impacts and examples - Reported impacts: - With Fund CD support, several members made significant reforms to exit FATF monitoring and be removed from public lists of countries with strategic AML/CFT deficiencies (examples: Afghanistan, Iraq, Kuwait, Nepal, Sudan). - CD supported implementation of measures under Fund-supported programs (examples: Iraq, Tunisia, Ukraine) and surveillance advice (examples: Angola, Oman, Qatar). - CD helped ease CBR pressures in Angola, Guatemala, Jamaica, and Sudan. - Independent evaluations: - An independent evaluation of Phase I of the Thematic Fund in 2014 concluded the program was successful and provided recommendations to enhance effectiveness. - A similar evaluation for Phase II (May 2014–December 2017) is underway. - Case examples (Box 6 highlights): - Sudan: IMF CD since December 2013 helped address deficiencies; FATF removed Sudan from monitoring in October 2015; MENAFATF removed Sudan from enhanced follow-up in April 2016; 2017 saw the first sanctions by Sudanese courts for ML and Sudan joined the Egmont Group. - Ukraine: CD supported anticorruption objectives of the Fund-supported program by strengthening AML/CFT supervision, FIU production of financial intelligence for corruption investigations, and information sharing among anticorruption institutions. Outcomes included development of risk-based AML supervisory tools, improved quality of inspections, increased regulatory sanctions for AML/CFT violations, increased suspicious transaction reporting analyzed by a dedicated anticorruption FIU department, and a marked increase in investigation and prosecution of corruption offenses by high-level public officials. _Italic: Source — Excerpt from pp101718-2018-review-of-the-funds-aml-cft-strategy (provided content)._ ### 52. The Fund will continue to enhance the efficiency and agility of the CD program to meet ### pp101718-2018-review-of-the-funds-aml-cft-strategy - 52. The Fund will continue to enhance the efficiency and agility of the CD program to meet ### Capacity Development (CD) program: efficiency, prioritization, and financing - The Fund will continue to enhance the efficiency and agility of the CD program to meet the increasing and evolving demand of member countries. - Prioritization of CD engagements will continue to be guided by the criteria set forth above and to support surveillance and Fund-supported programs. - Staff actions to improve CD delivery: - Coordinate with other TA providers. - Leverage new technologies for CD delivery, including development of online learning courses on AML/CFT. - Adapt and upgrade staff expertise and CD delivery to address current and emerging issues (examples given: CBRs, governance and corruption, Fintech, and PF). - Emerging issues may generate additional demand from the membership, though it is too early to quantify the magnitude of such demand. - Current financing model for AML/CFT CD: a combination of external and internal financing. - This model has thus far enabled the Fund to meet CD demand from the membership to a reasonable extent. - The financing model may need to be re-evaluated in the medium term to ensure appropriateness, sustainability, sufficiency of overall funding, and alignment with the Fund’s overall CD strategy. - This issue will be considered in the context of Phase III of the AML/CFT Fund to be launched in 2020. ### Other AML/CFT work: global policy engagement and integration into broader Fund work - The Fund continues to make significant contributions to the global AML/CFT policy agenda: - Staff provide input to the FATF and FSRBs, as well as the G20, FSB, and other global standard setters. - Involvement includes participating in international dialogue, reviewing and providing input on policy documents, and publishing on specific topics. - The Fund’s contributions have been well received and instrumental in helping members address financial integrity issues. - Financial integrity considerations integrated into Fund policy work on broader topics: - Examples where staff raised AML/CFT issues: Fintech, governance and corruption, CBRs, Islamic financing, and economic citizenship. - Fund policies have identified how ML/TF risks may materialize and how AML/CFT measures can help address these issues. - Staff has engaged in these policy developments in close collaboration with other stakeholders, such as the World Bank. - Specific staff activities and examples cited: - Staff undertaking research on best practices and challenges relating to entity transparency and strengthening CFT frameworks. - In March 2018, staff provided an update on the Fund’s work on CBRs to the Executive Board in an informal meeting. ### Box 7 highlights: AML/CFT issues within broader policy work - Fintech: - Fintech presents both solutions (Regtech/SupTech tools; data collection and data analytics to facilitate identification of suspicious transactions) and threats (some crypto assets). - Staff published findings including with respect to financial integrity (reference to a 2017 IMF Staff Discussion Note). - Staff discussed financial integrity implications of Fintech in the context of the Bali Fintech Agenda. - Staff participating in FATF discussions on potential changes to the standard to address crypto assets. - Staff started to address crypto-asset-related threats in Fund surveillance and FSAPs when systemic importance or when requested by members (example: 2018 staff report for the Article IV consultation with the Republic of the Marshall Islands and Selected Issues Paper). - Governance and Corruption: - Staff identified how AML/CFT tools can prevent or detect concealment of proceeds of corruption by foreign officials. - Correspondent Banking (CBRs): - ML/TF concerns and associated compliance costs are key drivers of pressures on CBRs. - Strengthening legal, regulatory, and supervisory AML/CFT frameworks and banks’ risk management capacity are important measures to alleviate CBR pressures. - Islamic Finance: - The Fund examined how some features of Islamic banking could alter exposure to ML/TF risks and provided policy advice to reassess adequacy of AML/CFT regimes. - Economic Citizenship Programs (ECPs): - ECPs can be misused by criminals; staff provided advice on AML/CFT measures to address misuse risks and risks of mismanagement of ECP-related resources. ### Convening role and regional initiatives on correspondent banking - The Fund has used convening power to bring together stakeholders (including private sector) to discuss financial integrity issues such as pressures on CBRs and Fintech. - Formats used: events at Annual and Spring Meetings, high-level workshops, seminars, panel discussions, region-specific initiatives. - Box 8 — Regional CBR initiatives (high-level summaries): - Caribbean: - First Caribbean roundtable on CBRs: Barbados, February 2017; 18 financial institutions participated. - Second roundtable: Jamaica, November 2017; a third roundtable scheduled for end of 2018. - Participants developed a traffic light matrix to identify impactful measures. - Pacific: - Two roundtables: Sydney and Auckland, February 2018; about 70 private sector representatives from global correspondent banks, respondent banks, and money transfer operators participated, alongside regulatory authorities and international institutions. - Sub-Saharan Africa: - High-level seminar for Governors of Central Banks of Sub-Saharan African countries: October 2017. - High-level workshop on withdrawal of CBRs among SADC members: South Africa, May 2018; attended by over 150 participants including global correspondent banks, regional banks, regional money transfer operators, respondent banks, and regulatory authorities. - Arab Region: - Two workshops on correspondent banking in coordination with the Arab Monetary Fund: October 2015 and September 2017. - Caucasus and Central Asia (CCA): - High-level workshop: April 2018, on the margins of the 2018 Spring Meetings, with representatives of global and regional correspondent banks, respondent banks, regulatory authorities, and international institutions. ### Continued engagement on emerging issues - The Fund should continue to remain engaged on emerging issues raising financial integrity concerns. - Staff should continue to discuss financial integrity considerations in relation to topics such as Fintech, illicit financial flows, and AML/CFT-relevant aspects of cybersecurity. - The Fund should continue to use its convening power to facilitate dialogue among stakeholders to deepen understanding and develop responses. ### Resources, staffing, and future resourcing needs - Current structure and budget envelope have enabled significant contributions within allocated resources. - Funding model: combination of internal and external sources. - While most workstreams are internally financed, since 2008 the bulk of AML/CFT CD work has been financed by a multi-donor Thematic Fund. - AML/CFT work is undertaken by the Legal Department with a workforce comprised of lawyers, financial sector experts, research officers, and support staff. - Since the 2014 Executive Board discussion, AML/CFT resources were strengthened: - Eight limited-term and contractual positions were reclassified to Term staff positions under the Fund’s new categories of employment framework (2015). - Three additional Fund-financed positions were added to the Legal Department’s structural budget. - Figures referenced (not reproduced here in detail in source): - Figure 10: Average Allocation of AML/CFT Resources per Workstream FY2015–2018 (in percentage of total time). - Figure 11: Financial Integrity by Output Areas (total FTEs) FY2014–2018. - Demand outlook and resourcing recommendation: - Demand for financial integrity work is expected to increase, notably given advancement of the fourth AML/CFT assessment round and emergence of new issues, particularly Fintech-related risks. - A small, incremental increase in resources in the medium term may be needed. - Any additional resources would be allocated across all workstreams following a risk-based approach. - Initial cost estimates will be included in the FY20–22 medium-term budget proposal, as warranted. ### Conclusion and recommendations - Overall strategic direction of the Fund’s AML/CFT program remains appropriate: - A risk-based approach and promotion of synergies among workstreams have kept the Fund at the forefront of ML/TF and financial integrity challenges for members. - Coordination with other global players has supported the global goal of safeguarding financial integrity. - Proposal to increase Fund participation in global quality and consistency efforts: - Staff to conduct one to two assessments per year in lieu of two to three, to contribute to review of quality and consistency of a greater number of assessment reports by other bodies and to conduct additional assessment-related training. - Continue issuing, upon request, AML/CFT ROSCs on the basis of final assessment reports following a pro forma review, as described in paragraph 43. - This reallocation aims to maximize the impact of the Fund’s overall involvement in AML/CFT assessment work. ### Issues for discussion (questions posed to Directors) - Do Directors support the approach taken to address financial integrity issues in Fund-surveillance and Fund-supported programs, as described in paragraphs 20 and 24? - Do Directors agree with the proposal to maintain the 2014 policy on FSAPs as described in paragraph 32? - Do Directors agree with the proposal to increase the Fund’s contribution to global efforts to ensure the quality and consistency of AML/CFT assessments by conducting one to two AML/CFT assessments per year and increasing the Fund’s participation in the review and training processes? Do Directors agree that staff should continue to issue, upon request, AML/CFT ROSCs on the basis of final assessment reports following a pro forma review, as described in paragraph 43? - Do Directors agree with the overall approach taken to AML/CFT CD delivery as described in paragraph 52? - Do Directors agree that staff should continue to address financial integrity concerns where relevant in emerging issues, including Fintech, as described in paragraph 56? *Source: Review of the Fund’s AML/CFT Strategy (excerpts, paragraphs 52–61).* ### Annex I. Background Information on the FATF, AML/CFT ### Annex I. Background Information on the FATF, AML/CFT Standard, and AML/CFT Assessments ### The FATF Network - The FATF is an inter-governmental body established by the G7 in 1989 to develop and promote national and international policies to combat ML, TF, and, more recently, PF. - Membership has grown from 16 members at inception to 37 at present (35 jurisdictions and 2 regional organizations). - The FATF is complemented by nine FSRBs; together, the FATF and the FSRBs comprise over 180 member jurisdictions. - Staff from both the Fund and World Bank are observers to the FATF and the FSRBs. - The FATF, FSRBs, the Fund, and the World Bank constitute the FATF’s global network. ### The AML/CFT Standard - The FATF has developed a series of Recommendations recognized as the international standard for combating ML, TF, and the financing of proliferation of WMD. - First issued in 1990, the FATF Recommendations were revised in 1996, 2001, 2003, and most recently in 2012. - The full title is “International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation.” They are referred to interchangeably as the AML/CFT standard, the FATF Recommendations, the FATF 40 Recommendations, or the FATF standard. - The Recommendations set out essential measures countries should implement to: - identify risks, and develop policies and domestic coordination; - pursue ML, TF, and PF; - apply preventive measures for the financial sector and other designated sectors; - establish powers and responsibilities for competent authorities and other institutional measures; - enhance transparency and availability of beneficial ownership information of legal persons and arrangements; - facilitate international cooperation. - Key elements introduced or strengthened in the 2012 revision: - Risk-based approach: Recommendation 1 provides that countries should identify, assess, and understand the ML and TF risks they face and take appropriate measures to mitigate those risks. - Tax crimes: The list of designated predicate offenses, the underlying crimes that give rise to ML, has been expanded to include tax crimes. - Proliferation financing: A new Recommendation requires countries to apply UN targeted financial sanctions to persons and entities that finance the proliferation of WMD; another Recommendation calls on countries to ensure national cooperation and coordination among competent authorities in preventing financing of proliferation. - Anticorruption: Revised Recommendations place a greater emphasis on action against corruption following calls from the G20. ### AML/CFT Assessments - Assessments against the FATF Recommendations are conducted by twelve assessor bodies: the FATF, the nine FSRBs, the Fund, and the World Bank. - All assessments are conducted on the basis of the FATF 2013 assessment methodology, following similar procedures. - The 2013 methodology includes two interrelated components: - Focus on legal and regulatory frameworks (technical compliance). - Focus on results achieved from implementation against the country’s specific ML/TF risk profile (effectiveness). - Two-step interrelated approach: - A mainly desk-based assessment of technical compliance with the AML/CFT standard. - An onsite assessment of the effectiveness of the AML/CFT regime measured by the extent to which the 11 Immediate Outcomes are being met. - The 11 Immediate Outcomes (IOs) are predefined objectives central to a robust AML/CFT system and together define the necessary measures to reach the high-level objective that “financial systems and the broader economy are protected from the threats of ML, TF, and proliferation, thereby strengthening financial sector integrity and contributing to safety and security.” - Starting point for assessors: understand the country’s risks and context. The concept of “risk” takes account of: - threats (e.g., criminals with money to launder); - vulnerabilities (e.g., weaknesses in the financial system that criminals could use to launder that money); - harm caused (e.g., actual or potential damage from the original crime and the laundering). - “Context” includes: - The country’s situation (e.g., general makeup of the economy and financial sector); - The structural foundations of the AML/CFT regime (e.g., an effective judicial system, sound government institutions, and rule of law); - Other factors affecting implementation (e.g., level of corruption or maturity of the regulatory regime). - How understanding of risks and context guides assessments: - Technical compliance assessment: whether the country meets the requirements of the FATF Recommendations as they relate to legal and institutional frameworks. - Effectiveness assessment: the extent to which the 11 Immediate Outcomes are met; assessors use judgment to reach a holistic conclusion on how well a country mitigates its ML, TF, and PF risks. - Technical compliance and effectiveness are rated separately but considered together in conclusions, which provide prioritized and integrated recommendations focusing on key deficiencies in the context of the country’s risks. ### The FATF 2013 Methodology — Immediate Outcomes (IOs) - High-level objective: protect the financial system and the broader economy from ML, TF, and PF, thereby strengthening financial sector integrity and contributing to safety and security. - Effectiveness is measured against 11 Immediate Outcomes (IOs): - IO.1 Risk, policy and coordination: Money laundering and terrorist financing risks are understood and, where appropriate, actions coordinated domestically to combat money laundering and the financing of terrorism and proliferation. - IO.2 International cooperation: International cooperation delivers appropriate information, financial intelligence, and evidence, and facilitates action against criminals and their assets. - IO.3 Supervision: Supervisors appropriately supervise, monitor and regulate financial institutions and DNFBPs for compliance with AML/CFT requirements commensurate with their risks. - IO.4 Preventive measures: Financial institutions and DNFBPs adequately apply AML/CFT preventive measures commensurate with their risks and report suspicious transactions. - IO.5 Transparency of legal persons and arrangements: Legal persons and arrangements are prevented from misuse for money laundering or terrorist financing, and information on their beneficial ownership is available to competent authorities without impediments. - IO.6 Financial intelligence: Financial intelligence and all other relevant information are appropriately used by competent authorities for money laundering and terrorist financing investigations. - IO.7 Money laundering investigation and prosecution: Money laundering offences and activities are investigated, and offenders are prosecuted and subject to effective, proportionate and dissuasive sanctions. - IO.8 Confiscation: Proceeds and instrumentalities of crime are confiscated. - IO.9 Terrorist financing investigation and prosecution: Terrorist financing offences and activities are investigated and persons who finance terrorism are prosecuted and subject to effective, proportionate and dissuasive sanctions. - IO.10 Terrorist financing targeted financial sanctions and nonprofit organizations: Terrorists, terrorist organizations and terrorist financiers are prevented from raising, moving and using funds, and from abusing the NPO sector. - IO.11 Proliferation financing targeted financial sanctions: Persons and entities involved in the proliferation of weapons of mass destruction are prevented from raising, moving and using funds, consistent with the relevant UNSCRs. ### Assessment Process and Timeline - The complexity of the methodology and strengthened review mechanism lead to a standard timeline longer than prior assessment rounds. - The formal process itself lasts on average 12 to 14 months. - Countries need to start preparing and gathering necessary information on average one year prior to submitting their contribution to assessors. - Key timing and steps reflected in the assessment process: - Country to prepare for assessment: 1–2 years prior to start date of the assessment. - Country to provide information: 6 months before onsite for technical information; 4 months before onsite for effectiveness information. - Drafting and scoping prior to the onsite: first draft technical compliance annex drafted and shared with the country for comments. - Onsite meetings: 2–3 weeks (meetings with public and private sector representatives). - Drafting and external review post onsite: at least two drafts of the report are shared with the country for comments; the second draft is also shared with external reviewers. - Face-to-face meetings: 2 days to discuss draft report and external reviewers' comments with the country. - Pre-Plenary Delegations' review: share final draft report with all FATF and FSRB countries for review and comments. - Plenary discussion: discuss comments made by the assessed country, by other FATF/FSRB countries, and adoption of the report. - Post-Plenary quality and consistency review: FATF and FSRB countries may raise significant quality and consistency issues; if no issues are raised, the report is published; if issues are raised, the report is sent to the FATF for (re-)discussion. *Source: Annex I. Background Information on the FATF, AML/CFT Standard, and AML/CFT Assessments (Review of the Fund’s AML/CFT Strategy).* --- _Source: https://www.imf.org/-/media/files/publications/pp/2019/pp101718-2018-review-of-the-funds-aml-cft-strategy.pdf_