Canada: The Evolution Of International AML And CTF Standards: A Review Of The Revised FATF Recommendations

Last Updated: March 20 2012
Article by Robert E. Elliott and Koker Christensen

On February 16, 2012 the Financial Action Task Force (FATF) released revised FATF Recommendations, which re-organize and streamline the original FATF Forty Recommendations on international anti-money laundering (AML) standards and the Eight (later expanded to Nine) Special Recommendations on Terrorist Financing and introduce some important changes. Most of the revised FATF Recommendations – now 40 in all – include interpretive notes that provide guidance on implementation. The FATF Recommendations address new and emerging risks and, importantly, will allow countries to choose to implement a more flexible risk-based approach that would allow countries, financial institutions and others affected to focus scarce resources on higher-risk areas.

The first FATF Recommendation – which requires countries, financial institutions and others to assess money laundering (ML) and terrorist financing (TF) risks and to apply a risk-based approach to identified risks – is new, elevating previous guidance to a Recommendation. Most of the former counter terrorist financing (CTF) Special Recommendations have been integrated throughout the revised FATF Recommendations, although three Recommendations (5, 6 and 8) deal specifically with CTF issues. Reflecting an expansion of FATF's mandate in 2008, a new Recommendation 7 addresses the implementation of targeted UN financial sanctions dealing with the proliferation of weapons of mass destruction.

This Bulletin summarizes some of the revised FATF Recommendations that are of particular interest.

Recommendation 1 – Assessing Risks and Applying a Risk-Based Approach

This new recommendation advises each country, financial institution and designated non-financial business and profession (DNFBP) to take steps to identify and assess the ML and TF risks it faces on an ongoing basis. At a country level, this assessment is expected to inform changes necessary to the country's legal and administrative regime for AML and CTF, assist in the prioritization and allocation of resources, and make information available to financial institutions and DNFBPs for their own risk assessments.

Where higher risks are identified, the legal regime should be updated, and either financial institutions and DNFBPs will be expected to adopt enhanced or specific measures, or ensure that this information is incorporated into their own risk assessments to manage and mitigate these risks. Except where higher-risk measures are mandated, a risk-based approach permeates the FATF Recommendations. Countries may permit the adoption of simplified measures for some FATF Recommendations where they (and financial institutions) have identified lower risks based on risk assessments. In addition, countries may permit financial institutions and DNFBPs to adopt simplified customer due diligence (CDD) (also see Recommendation 10) and other simplified measures for lower-risk activities, provided that they have taken appropriate steps to identify and assess their own ML and TF risks, and have policies, controls and procedures to manage and mitigate those risks appropriately. This is in line with the internationally accepted approach to risk management: net risk equals the inherent risk(s) of an activity after mitigation by the quality of the risk management of that activity. In limited circumstances, where there is a lower risk, countries may decide not to apply certain Recommendations to particular types of financial institutions or activities, or where a financial activity (other than money transfer) is carried out by a legal person on an occasional or very limited basis. Simplified CDD measures are not acceptable where there is a suspicion of ML or TF, or in a higher-risk scenario.

Accordingly, it is possible that (1) simplified CDD and other measures will be permitted by countries for certain activities and/or (2) countries will allow reporting entities to take simplified measures where they have assessed the risk of a specific activity as lower. Higher-risk activities may mandate enhanced CDD and other measures. Reporting entities operating in multiple regions of a country or internationally would adjust their approach to specific activities depending on both the country assessment and their own assessment of risk related to the activity in that area. While a risk-based approach would allow institutions to take a more flexible and sophisticated approach, this may require institutions to adopt more complex programs for risk assessment and compliance. Institutions will have to be able to justify the choices they make, and must be prepared to adjust how they address specific risks as a result of re-assessments of those risks both by themselves and by the countries in which they operate.

Recommendation 7 – Targeted Financial Sanctions Related to Proliferation

Reflecting FATF's expanded mandate to deal with proliferation issues, this new Recommendation urges countries to implement targeted financial sanctions to comply with United Nations Security Council resolutions related to the prevention, suppression and disruption of proliferation of weapons of mass destruction and its financing. Countries should have mechanisms for communicating designations of persons and entities to financial institutions and DNFBPs with clear guidance on obligations to take action to freeze targeted funds and other assets. Financial institutions and DNFBPs are expected to report on frozen funds and assets and on actions taken in compliance with the prohibitions to competent authorities, which information should be effectively utilized. Countries are also expected to monitor and ensure compliance by financial institutions and DNFBPs with laws related to non-proliferation.

While reporting entities are presumably already complying with applicable Canadian laws, the effect of this Recommendation may be increased monitoring and enforcement of these laws. Reporting entities will need to ensure that they have appropriate compliance systems in place to meet applicable legal requirements.

Recommendation 10 – Customer Due Diligence

This updated standard identifies when financial institutions should be required to undertake CDD measures, including when carrying out occasional transactions above the applicable designated threshold, which remains unchanged at USD/EUR 15,000, or that are wire transfers subject to CDD measures under another Recommendation.

The extensive interpretive note to this Recommendation identifies CDD measures that reporting entities should undertake in respect of customers and beneficial owners. Life insurance companies are now expected to undertake CDD measures with respect to beneficiaries at the time they are designated (names are to be taken) and at the time that a party is paid out (the identity of beneficiaries is to be verified). Life insurance policy beneficiaries are a relevant risk factor in determining whether enhanced CDD measures are appropriate. Financial institutions are advised to adopt risk management procedures establishing the conditions under which a customer may conduct business with the institution before identification has been verified. An institution should be able to monitor large or complex transactions that are unusual given the nature of the relationship with a customer.

A risk-based approach does not apply to circumstances where CDD should be required, but instead may be used to determine the extent of measures taken in light of assessed risk. To assist financial institutions with the establishment of a risk-based approach to CDD, when assessing risks related to types of customers, countries or geographic areas, and products, services, transactions and delivery channels, institutions are advised to consider variables related to these risk categories, which may increase or decrease risk and therefore impact on the level of CDD appropriate in the circumstances. Examples of variables include the purpose and regularity or duration of the relationship, and the size of the transaction.

The interpretive note provides examples of customer, country or geographic, and product, service transaction or delivery channel risk factors that may (but do not necessarily) indicate a higher-risk situation. These include the following:

  • the business relationship is conducted in unusual circumstances (e.g. significant unexplained geographic distance between the financial institution and the customer);
  • non-resident customers;
  • legal persons or arrangements that are personal asset-holding vehicles;
  • anonymous transactions (which may include cash); and
  • non-face-to-face business relationships or transactions.

Where risks are assessed as higher, enhanced CDD measures commensurate with those risks are expected to be carried out. Additional information may be required, examples of which are listed, and enhanced monitoring may be appropriate.

The interpretive note also provides examples of potentially lower risk circumstances, including the following:

  • life insurance policies where the premium is low (e.g. an annual premium of less than USD/EUR 1,000 or a single premium of less than USD/EUR 2,500);
  • insurance policies for pension schemes if there is no early surrender option and the policy cannot be used as collateral;
  • a pension, superannuation or similar scheme that provides retirement benefits to employees, where contributions are made by way of deduction from wages, and the scheme rules do not permit the assignment of a member's interest under the scheme; and
  • financial products or services that provide appropriately defined and limited services to certain types of customers, so as to increase access for financial inclusion purposes.

The interpretive note also posits that a country could reasonably allow financial institutions to apply simplified CDD measures where an adequate assessment indicates that the ML or TF risk is lower. The note helpfully suggests examples of circumstances in which customer, country, or product, service, transaction or delivery channel risk factors may suggest a potentially lower-risk situation. Countries' and financial institutions' risk assessment may identify variations in risk between different regions of a country. It is also noted that an assessment of lower risk for identification and verification purposes may not necessarily mean lower risk for monitoring purposes. Simplified CDD measures may be permissible, such as the verification of a customer's identity and beneficial ownership after the establishment of a business relationship, reduced frequency of information updates, reduced levels of ongoing monitoring, or no requirement to collect certain information.

As noted above, where countries permit it, a risk-based approach to CDD may allow reporting entities to re-allocate their AML and CTF compliance program resources based on their own assessment of risks related to their activities. This would allow CDD to reflect institutional self-assessment of risks in specific situations, but institutions will have to be able to justify their approach. Where a country's legal regime currently provides for exemptions from the application of certain AML requirements, it is unclear whether those exemptions will be retained or replaced by a risk-based approach which requires some level of compliance even if the risk is determined to be lower.

Recommendation 12 – Politically Exposed Persons

Foreign politically exposed persons (PEPs) (whether a customer or beneficial owner) represent higher risk. Specified enhanced CDD measures should be undertaken when foreign PEPs are identified.

Financial institutions should be required to take reasonable measures to determine whether a customer or beneficial owner is a domestic PEP or a person who is or has been entrusted with a prominent function by an international organization. In a higher-risk business relationship with that person (i.e., applying a risk-based approach in respect of the domestic PEP), institutions should be required to apply specified measures referred to in the Recommendation.

The interpretive note to this Recommendation suggests that financial institutions should take reasonable measures to determine whether the beneficiaries (or the beneficial owner of beneficiaries) of a life insurance policy are PEPs – at the latest – at the time of a payout on a policy. Where higher risks are identified, in addition to normal CDD measures, a financial institution should be required to inform senior management before a payout is made, conduct enhanced scrutiny of the policyholder business relationship, and consider making a suspicious transaction report.

Recommendation 17 – Reliance on Third Parties

This Recommendation potentially provides added flexibility as it now recognizes that competent authorities in a country may permit a financial institution to rely on a third party that is part of the same financial group to perform certain CDD measures through a group AML and CTF program, provided that the group applies CDD and record-keeping requirements in line with the Recommendations dealing with CDD, record-keeping and PEPs and group wide internal controls, and where these programs are supervised by a relevant competent authority in the home jurisdiction for the financial group.

Recommendation 18 – Internal Controls and Foreign Branches and Subsidiaries

Financial groups should be required to implement group-wide AML and CTF programs, which have policies and procedures for sharing information within the group. Non-domestic branches and subsidiaries should apply AML and CTF measures consistent with the home country requirements implementing the FATF Recommendations. The interpretive note suggests that where the host country minimum AML and CTF requirements are less strict than those of the financial group's home jurisdiction, branches and subsidiaries in host countries should be required to implement the stricter home country requirements to the extent that the laws of the host country permit.

Recommendation 19 – Higher-Risk Countries

Financial institutions should be required to apply enhanced due diligence measures to business relationships and transactions with natural and legal persons, and financial institutions, from countries for which this is called for by the FATF. Countries should be able to apply appropriate countermeasures when called upon to do so by the FATF and independently. The interpretive note provides examples of countermeasures, which include the following:

  • refusing the establishment of subsidiaries or branches or representative offices of financial institutions from the country concerned, or otherwise taking into account the fact that the relevant financial institution is from a country that does not have adequate AML/CFT systems;
  • prohibiting financial institutions from establishing branches or representative offices in the country concerned, or otherwise taking into account the fact that the relevant branch or representative office would be in a country that does not have adequate AML/CFT systems;
  • prohibiting financial institutions from relying on third parties located in the country concerned to conduct elements of the CDD process;
  • requiring financial institutions to review and amend, or if necessary terminate, correspondent relationships with financial institutions in the country concerned; and
  • requiring increased supervisory examination and/or external audit requirements for branches and subsidiaries of financial institutions based in the country concerned.

Recommendations 24 and 25 – Transparency and Beneficial Ownership of Legal Persons and Legal Arrangements

The interpretive notes to these recommendations state that all companies and express trusts created in a country should be registered in a company registry or trust database and that countries should require their company registry or data holders to facilitate timely access by financial institutions, DNFBPs and other countries' competent authorities to the public information they hold. The interpretive note also states that countries should consider facilitating timely access by financial institutions and DNFBPs to a register of shareholders of members of a company containing details regarding shareholdings. Similarly, countries should consider measures to facilitate access to information on trusts held by various parties by financial institutions and DBFBPs undertaking CDD measures. These suggestions would, if adopted, potentially be of significant assistance to reporting entities in the course of their CDD activities.

* * * * * *

With the revised FATF Recommendations now in place, the focus now shifts to countries to take the next steps to assess their own legislative and administrative regimes, and to consult with stakeholders, about the implementation of these Recommendations.

www.fasken.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions