Islamic Finance and Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)
IMF Working Papers, February 29, 2016
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- Islamic Finance and Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT)
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Bibliographic details
- Authors: Nadim Kyriakos-Saad, Manuel Vasquez, Arz El Murr
- Published: February 29, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513516158.001
Summary
- The money laundering (ML) and terrorist financing (TF) risks associated with conventional finance are generally well identified and understood by the relevant national authorities.
- There is no common understanding of ML/TF risks associated with Islamic finance.
- Some ML/TF risks in Islamic finance are likely the same as in conventional finance, but there may also be different risks due to:
- the complexity of some Islamic finance products; and
- the nature of the relationship between the institutions and their clients.
- Limited capacity and experience in the supervision of Islamic finance, especially in jurisdictions that face higher ML/TF risk factors, represents an additional vulnerability.
- The Financial Action Task Force (FATF) standards are implemented without any form of tailoring to the specificities of Islamic finance.
- The FATF, the Islamic finance standard-setters, and national regulators should seek a greater understanding of the specific ML/TF risks that may arise in Islamic finance and develop an appropriate response.
Key Findings and Analysis
- Lack of a common understanding of ML/TF risks specific to Islamic finance creates supervisory and regulatory gaps.
- Product complexity and client–institution relationship structures in Islamic finance can generate distinct ML/TF vulnerabilities not fully addressed by current frameworks.
- Jurisdictions with limited supervisory capacity face heightened exposure to ML/TF risks in the Islamic finance sector.
- Current implementation of FATF standards does not reflect tailoring for Islamic finance specificities.
Policy Recommendations
- FATF, Islamic finance standard-setters, and national regulators should:
- Develop a greater understanding of specific ML/TF risks in Islamic finance.
- Design and implement an appropriate response that addresses the particular features of Islamic finance.
- Strengthen supervisory capacity and experience in jurisdictions with higher ML/TF risk factors to reduce vulnerabilities.