The Financial Action Task Force (FATF)

The FATF is an international organisation established by the G7 countries in 1989 to advise on policies for combating money laundering. It has produced the “40+9”

recommendations for such action, which have become an international standard in the area. The recommendations have been revised over time. Nine related to financing terrorism were added to the original 40 in 2001. Thirty-two countries and two organisations (the European Commission and the Gulf Cooperation Council) are members. In addition, two countries have observer status.

As the name indicates, the FATF is not intended to be a permanent organisation. Its present mandate expires in 2012.

The FATF evaluates the implementation of its recommendations by the members.

Reports from these assessments are publicly available providing the country

concerned does not oppose publication. No country has lived fully up to all the 40+9 recommendations.

88 StAR stands for stolen asset recovery.

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A process was launched by the FATF in 1998 to identify countries which represented problem areas in the fight against money laundering. During 2000-01, 23 countries and jurisdictions were defined as “non-cooperative”. These countries were notified that certain measures would be taken against those which did not cooperate by taking specified actions against money laundering. The proposed punitive measures involved intensified monitoring and reporting of transactions related to non-cooperative

countries. The countries categorised as non-cooperative have all strengthened their efforts against money laundering, and the last of them was removed from the list in 2006.

A particular problem is perhaps that the FATF – because of opposition from tax havens and others – does not regard tax evasion as an illicit act which could form the basis for criminal charges of money laundering.

In its declaration after the London meeting in April 2009, the G20 stated that the FATF should revise and strengthen its process for evaluating implementation of the recommendations by the jurisdictions, and report back to the G20 whether each country accepts and is implementing the recommendations.

Box 10: Efforts to combat money laundering – participation by tax havens

International collaboration against money laundering is pursued through a number of different bodies, including the FATF, the IMF and the Egmont Group. A number of tax havens participate in some or all of these fora. In many cases, they have also implemented recommendations from the FATF and others on regulations and systems to combat money laundering. The Commission takes the view that tax havens nevertheless represent one of the principle problems for efforts to combat money laundering.

When a criminal receives the proceeds of a crime, they will eventually want to use this money for consumption or investment. Perhaps the most important stage in the fight against money laundering is the first persons to receive such funds, either as payment for a product, a service or a capital object, or in the form of a management assignment on behalf of the owners. One of the key elements in fighting money laundering is an obligation to report suspicious transactions. This obligation rests in most countries on bank staff as well as on employees in the rest of the financial industry and in a number of other sectors.

In practice, reporting a transaction which proves to involve money laundering means that the reporter loses a customer. Ignoring the reporter’s moral views, the choice between reporting or not will depend on balancing the risk of being caught for failing to report and the penalties that incurs against the cost of losing the customer and other possible customers involved in money laundering. If one has systems well suited for concealing funds, they will attract money laundering. At the same time, such systems will often also make it difficult for the country’s own authorities to expose the money laundering and any breaches of the reporting obligation. The business people who manage such systems will accordingly have weak economic incentives to report suspicious transactions.

Data on the number of reports concerning suspicious transactions submitted to the relevant authorities have been published in a number of jurisdictions. The number of such reports correlate with the number of inhabitants, but should also relate to whether the country is a financial centre which receives substantial funds for management from abroad. In addition, it seems reasonable to assume that general attitudes towards and the quality of enforcement of laws and regulations should be significant for the number of reports.

The figure below shows the number of reports per USD 1 billion in assets under management in the banking system. Such assets are intended to provide an indicator of the scale of financing activity registered in the jurisdiction. It might perhaps have been more appropriate to compare the number of reports with the number of customers and include the whole financial sector (including trusts and the like), but such data are not available.

The figure shows very substantial differences in reporting frequency between the various jurisdictions.

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There is a tendency for this frequency to be low in tax havens. Of the jurisdictions in the figure, the Commission regards the Cayman Islands, Switzerland, the Bahamas, Malta, Liechtenstein, Jersey, Guernsey, Mauritius, Bermuda and Panama as secrecy ones. The first eight of these have the lowest reporting frequency. Bermuda and Panama have reporting frequencies on a par with or higher than some of the open jurisdictions (India and Norway). A number of tax havens have fairly extensive inward direct investment, international insurance business, and/or trusts and the like (confer chapter 6).

Had it been possible to take the size of the whole financial industry into account, the differences between the secrecy and open jurisdictions would probably have become even more striking.

Jurisdictions included in the figure have been selected from the participants in the Egmont Group, which is the international organisation for national institutions responsible for efforts to combat money laundering.

Figur 8-1: Number of ”Suspicious transaction reports” sent to the authorities per 1billion USD of bank assets in the economy. Most recent year for selected countries and jurisdictions.

0,0 20,0 40,0 60,0 80,0 100,0 120,0 140,0

Caym an Island

Sveits Baha

mas Malta

Lichtenstein Jersey

Guer nse

y Maur

itius Sin

gap ore India

Bermuda Norge

Panam

a UK

Barbados Brasil Sør-Afrika

Indon esia

USA

The great majority of the reports on suspicious transactions are shelved without investigation. Only a modest proportion lead to charges and a court judgement. Many of the tax havens have extremely large international activities relative to the size of their population and economy. In a number of cases, it is virtually inconceivable that these jurisdictions have the capacity to control money laundering, and not least to pursue cases through investigation and trial. No systematic studies are available which compare the number of cases related to money laundering which are investigated and brought before the courts in different countries. Where data do exist, they suggest that the tax havens conduct little investigation and trial of such cases. The National Audit Office (2007) report shows that only two judgements were delivered with regard to money laundering during 2006 in the British Overseas Territories. Both were in the Cayman Islands. No judgements were recorded for money laundering in the other territories (Bermuda, the Virgin Islands, Gibraltar, the Turks and Caicos Islands, Anguilla and Montserrat), but four cases were awaiting trial. Almost 800 reports in all were submitted on suspicious transactions. A number of the jurisdictions have been criticised by the IMF and the FATF for poor capacity to deal with economic crime, but these jurisdictions have a total of 57 employees working in this area. Viewed in relation to that capacity, two judgements might seem a low number. However, investigators working on economic crime are not only concerned with money laundering.

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