AML/CFT: Mauritius revises its Fit and Proper Person test
Considering that money laundering and other scandals are becoming rampant everywhere around the world, it is important for jurisdictions to introduce the appropriate measures so that firms operating in their area and investors are protected. This has become more than essential. Following this line, Mauritius has been strengthening its financial sector. One of the measures taken is amendments to the Fit and Proper Person test. On the 2nd of October 2020, the Financial Services Commission (FSC) rolled out its revised “Guidelines on Fitness and Propriety”. This is to ensure that businesses conducted in the financial services and global business sector is done in a sound environment. The guidelines became applicable as from the 1st of November of the same year. What is the Fit and Proper Person test? The Financial Services Authority has listed out the criteria determining whether a person is ‘fit and proper’. This pertains to their “ability to perform the relevant functions properly, efficiently, honestly and fairly” and their “reputation, character, financial integrity and reliability”. To put it simply, they are able to conduct business in an honest and right way. What will be assessed? The financial standing, relevant education, qualifications and experience, reputation, character, financial integrity, reliability and their capacity to perform relevant functions properly, efficiently, honestly and fairly. Who are going to be assessed by the regulatory institution? Besides the ‘person’, who is the applicant, the fit and proper test involves anyone who is, or will be, employed by, or is associated with the person and any representation or agent of the applicant. In the case of the applicant being a corporation, it will look at the officers and any shareholder of the corporation, its related corporations and their officers. A first ‘Fit and Proper Test’ will be conducted when a person, or a firm, submits an application for a licence or requests any other authorisation from the FSC. Following this, the test will be applied on a continuous basis to ensure that the applicant remain ‘fit and proper’ at all times. Why conduct the “Fit and Proper Person” test? What is the purpose of the ‘Fit and Proper Person” test? The FSC has determined several reasons, listed below, for conducting this assessment. It should be noted that the list is non-exhaustive. The test aims to: establish a standard benchmark for licensing and for continuous regulation and supervision of licensees/applicants, encourage high standards of conduct in the market, maintain a high level of confidence and trust amongst those using (Mauritius as a base for their business. This is also applicable to those considering to do so, act as a deterrent to protect the interests of consumers of financial services in the country, promote a business environment that meets acceptable international standards, deter dishonest, incompetent, unskilled or inappropriate operators in Mauritius. deter making an abuse of the Mauritian financial market, and to ensure that persons, who are not “fit and proper” to perform functions in a regulated field of activity, are precluded from doing so, in the public interest. What are some of the amendments in the Guidelines? The guidelines with regards to the ‘Fit and Proper Test’ have been amended to increase the efficiency of the test and to increase the safety of the financial sector in Mauritius. The scope of the ‘Fit and Proper’ test has been extended. Now, besides just the applicant, benefit owners and the controllers of a licence being assessed, the FSC will look at other persons whose involvement will be relevant. Incumbent officers such as the money laundering reporting officer (the “MLRO”), the deputy MLRO and the compliance officer, and the external and outsourced auditors of regulated entities will also be assessed to determine whether they are ‘fit and proper’. According to the previous guide, the FSC has the right to make this assessment to determine whether an individual is capable enough to take over, or hold, a particular or a proposed position. To generate an impact on the long-term, the guidelines have been revised to give the FSC more power to keep reviewing whether the person is still meeting the conditions involved in the ‘fit and proper’ test. This means that the process is a continuous one and the entity may have its licence revoked following the result of the test. The FSC has also reviewed the questionnaire of the ‘Fit and Proper’ test. It is now more extensive than the previous version. Now, the following documents must be provided for the test: previous residential addresses, occupation, and regulatory approvals or licences held (with dates of approvals) for the ten preceding years, information concerning the principal bank account. For instance, the opening date of said account, and affiliations with politically exposed persons, and several new confirmations, to know if the applicant acts under the directions of others. Applicants have to notify the FSC in the event of changes within 30 days. Moreover, the FSC has the authorisation to make further enquiries and seek any information it deems appropriate while conducting the assessment and verifying the information disclosed in the questionnaire.
Financial scandals: why are AML and KYC important?
Financial scandals… It seems that we have had our fair share of these in 2020. Even well-established firms saw themselves in the limelight because of controversies within their companies. In fact, regulators had to hand out fines worth approximately USD 5.1 billion for Anti-Money Laundering (AML) and Know Your customer (KYC) violations. A huge part of these was imposed on Goldman Sachs and Westpac. These firms were the landmark cases of 2020. Let’s have a look at what went wrong so that financial institutions can prevent this from happening again. The case of Goldman Sachs and the 1MDB scandal This might have been the biggest scandal that we have heard of. What did Goldman Sachs, a leading global investment banking firm did wrong? Well, first of all, as from early on, there were certain red flags that arose with regards to how Jho Low, a private banking customer, generated his wealth. These were, reportedly, dismissed by the firm’s agents who proceeded with doing business with the businessman and his associates. There were several transactions related to the three 1MDB bonds held with Goldman Sachs. Not only does this scandal involve criminal misconducts from several executives, but it also highlights how various red flags about 1MDB that were raised over the years were disregarded. These should have allowed officials to identify and stop misconducts. Instead, various Goldman bankers committed frauds to steal approximately USD 2.7 billion from 1MDB for their own personal gain. This might seem to be something trivial, but what happened to Jho Low and the repercussions on Goldman Sachs show a lack in bank culture. Moreover, there were allegations that the firm was not diligent enough in its regulatory practices. To put it simply, even if it was supposed to constantly monitor financial activities taking place, it was unable to identify the fraud taking place right under its nose. What happened in Westpac’s case? In the case of Westpac, the firm admitted that it was guilty of some of the charges against it. It was accused of knowing that a customer was charged for child exploitation offences. Moreover, he was one of its many customers sending funds to the Philippines. Needless to say that child exploitation is a huge concern there. It should not have been difficult to put two and two together, right? However, that did not happen. Whether its team failed to make the link or chose to disregard it, we will never know. Speaking about the scandal, Westpac admitted to “breaking the law by failing to monitor whether a dozen customers were making transactions consistent with child exploitation”. AUSTRAC, the government agency set up to monitor financial transactions to identify money laundering and other financial crimes, said that this was a failure from Westpac’s part to carry out appropriate customer due diligence in relation to suspicious transactions associated with possible child exploitation cases. Lessons to be learnt- how should due diligence be conducted? What happened with Goldman Sachs showed us the importance of due diligence. It should be noted that this must not be done only once at the start of the ‘relationship’. Instead, due diligence must be carried out consistently and holistically throughout the partnership. Moreover, to ensure effective communication among all members of a financial institution and so that no details slip through the cracks and fraud can be detected and resolved, all business decisions must be recorded in sufficient details somewhere that is accessible to all business areas. In the case that the relationship is terminated or declined, the reason behind this should be mentioned clearly in the customers’ due diligence records. This will be utilised by for constant monitoring activities. Documenting, record-keeping and following up on the information recorded is of utmost importance. This will make sure that all risks are identified and assessed at some point in time. Lessons to be learnt- how to ensure AML controls are efficient? While Anti-Money Laundering controls must be established by all companies, financial firms must make sure that AML professionals are regularly trained on current technologies. This is because new money laundering tools are constantly being developed according to regions, products, service offerings, customer types and other factors. With advancements in the tech sector, it is normal that criminal groups and those wishing to launder money are getting smarter and equipped with better tools. Thus, transaction monitoring systems and those working to detect frauds have to remain up-to-date and relevant as well. Monitoring solutions must be robust and strong enough to detect and oversee changes regarding customer behaviour and suspicious activities, especially when higher risk transactions are involved. For instance, Westpac had a 3LoD (three lines of defence) to combat risk. Nonetheless, its structure was not consistently integrated within the bank, which means that its employees often misunderstood their roles and responsibilities. Thus, financial institutions must make sure that their staff are given sufficient training. What can we take from these cases? These two cases show us the importance of due diligence, KYC and AML protocols. Moreover, it shows that ensuring compliance is not something that must be left to the financial firm only. This is because within an organisation, there can be corrupt officers or simply those not trained enough to detect criminal activities. Thus, a robust anti-money laundering culture must be established within the whole jurisdiction. For instance, Mauritius is a member of the Eastern and Southern Africa Anti-Money Laundering Group. This is a regional inter-governmental body established to combat money laundering and terrorism financing in the eastern and southern African region. The island constantly improves its existing regulations, procedures and systems to combat money laundering. For instance, it has amended the FIAMLA, POCA, POTA and enacted the FIAML Regulations and UN Sanctions Act in order to meet the FATF requirements and improve its AML/CFT framework. Moreover, Mauritius has an anti-money laundering and terrorism financing regime which makes it easier for many businesses to apply AML/CFT processes and procedures. As such, financial firms are better guided to establish the appropriate
Major Money Laundering Countries
In recent years, money laundering is rapidly growing. So the amount of dirty money. Governments and financial institutions try to protect themselves from this crime. What Is The Basel AML Index? Basel Institute of Governance is an independent, international, non-profit organization committed to preventing and combating corruption and other financial crime. The organization was established in Basel, Switzerland. Each year Basel prepares an independent score and ranking that assesses the risk of money laundering and terrorist financing in the world. This ranking is the Basel AML Index. This year (2020) published the ninth raid. Published by the Basel Institute of Governance since 2012, this document gives risk scores based on data from 15 publicly available sources such as the Financial Action Task Force (FATF), the World Bank, and the World Economic Forum. Risk scores cover five areas: Quality of AML / CFT framework Bribery and corruption Financial transparency and standards Public transparency and accountability Legal and Political Risks The primary objective is not to rank countries superficially compared to each other, but to give an overall view of different countries ‘and regions’ risk levels and their progress in addressing vulnerabilities over time. The average money laundering risk increased compared to last year, as the Basel Institute of Management published the 2020 anti-money laundering index, which assesses the risks of money laundering / terrorist financing of 141 countries. Basel AML Index 2020: Weak oversight and dormant systems leave countries’ doors open to money laundering. The 2020 Basel AML index disappointed everyone seeking concrete progress in fighting money laundering and terrorist financing global. The average risk score across all 141 countries on the list remains unacceptably high, at 5.22 out of 10. 10 here is equal to the maximum risk. Only six countries have increased their scores more than once. 35 countries went backward. However, many countries’ financial systems are extremely vulnerable to money laundering, terrorist financing, and related crimes. SCORES AND RANKING Top 10 countries with the highest AML risk are Afghanistan (8.16), Haiti (8.15), Myanmar (7.86), Laos (7.82), Mozambique (7.82), Cayman Islands (7.64), Sierra Leone (7.51), Senegal (7.30), Kenya (7.18), Yemen (7.12). Top 10 countries with the lowest AML risks are Estonia (2.36), Andorra (2.83), Finland (2.97), Bulgaria (3.12), Cook Islands (3.13), Norway (3.19), New Zealand (3.24), Sweden (3.32), Slovenia (3.35), Denmark (3.46) REGIONAL FOCUS The Basel AML Index follows the World Bank classification of countries, with an additional separation of Europe and Central Asia into two regions: European Union and Western Europe Europe and Central Asia East Asia and Pacific Latin America and Caribbean Middle East and North Africa North America South Asia Sub-Saharan Africa 1)European Union and Western Europe The region generally has a lower risk than the global average. Its biggest shortcoming is the quality of AML / CFT frames. Overall risk score is 4.01 Quality of AML / CFT framework is 4.6 Bribery and corruption 3.16 Financial transparency and standards 3.26 Public transparency and accountability 1.93 Legal and political risk 2.89 Countries are; Estonia (2,36), Andorra (2,83), Finland (2,97), Bulgaria (3,12), Norway (3,19), Sweden (3,32), Slovenia (3,35), Denmark (3,46), Lithuania (3,51), Spain (3,66), Portugal (3,66), Greece (3,73), France (3,92), Slovakia (3,95), Croatia (3,95), Belgium (3,98), United Kingdom (4,02), Iceland (4,25), Czech Republic (4,29), Poland (4,36), Austria (4,38), Germany (4,42), Ireland (4,46), Netherlands (4,56), Italy (4,61), Latvia (4,62), Switzerland (4,74), Luxembourg (4,74), Romania (4,79), Cyprus (4,81), Hungary (4,99), Malta (5,48) We list Belgium, Cyprus, Malta, Netherlands, Spain, and the UK as a significant money-laundering destination. High levels of financial secrecy undermine AML/CFT frameworks in Switzerland, Luxembourg, Netherlands, and the UK 2) Europe and Central Asia The risk average of the region is close to the global average. Weaknesses; corruption, bribery, and legal and political risks. Overall risk score is 5.22 Quality of AML / CFT framework is 5.28 Bribery and corruption 5.93 Financial transparency and standards 5.16 Public transparency and accountability 2.85 Legal and political risk 5.73 Countries are; Montenegro (3,75), North Macedonia (3,98), Georgia (4,54), Armenia (5,00), Kazakhstan (5,08), Moldova (5,14), Ukraine (5,23), Azerbaijan (5,24), Serbia (5,47), Russia (5,51), Bosnia-Herzegovina (5,63), Albania (5,69), Uzbekistan (5,71), Turkey (5,76), Tajikistan (6,02), Kyrgyztan (6,32) The weakest areas are Corruption and issues with political and civil rights, media freedom, and the judiciary’s independence. We list three-quarters of the countries as major money laundering destinations. The area faces high risks of human trafficking, with the highest exposure level in Russia 3) East Asia and Pacific The region’s risk average is slightly higher than the global average. The most prominent weaknesses relate to the quality of the AML / CFT framework itself and underperformance regarding public transparency and accountability. In both areas, technical and legal adjustments and effective implementation would need to be the focus of future reform. Overall risk score is 5.46 Quality of AML / CFT framework is 6.08 Bribery and corruption 4.41 Financial transparency and standards 4.68 Public transparency and accountability 4.08 Legal and political risk 3.91 Countries are; Cook Islands (3,13), New Zealand (3,24), Australia (3,84), Taiwan-China (4,31), Singapore (4,56), South Korea (4,61), Indonesia (4,62), Hong Kong SAR-China (4,99), Japan (5,16), Malaysia (5,25), Samoa (5,27), Vanuatu (5,29), Marshall Islands (5,57), Philippines (5,67), Macao SAR-China (5,72), Thailand (6,01), Mongolia (6,24), China (6,76), Vietnam (7,04), Cambodia (7,10), Laos (7,82), Myanmar (7,86) Weakest area is the quality of AML/CFT frameworks. We list nearly half of all countries as a major money-laundering destination – China, Hong Kong, Indonesia, Laos, Macao, Malaysia, Myanmar, Philippines, Thailand, and Vietnam. Hong Kong, Japan, Singapore, and Taiwan face the most massive issues with financial secrecy. 4) Latin America and Caribbean Only around half of the countries in this area have undergone a FATF fourth-round evaluation. The primary deficiencies lie in high levels of corruption and bribery, low financial transparency levels, and weak public transparency and accountability. Overall risk score is 5.36 Quality of AML / CFT framework is 5.39 Bribery and corruption 5.77 Financial transparency and standards 5.59 Public transparency and accountability 4.41 Legal and political risk 4.7 Countries are; Chile (3,82), Dominica (3,88), Uruguay (3,94), Grenada (4,12),
Mauritius Listed on EU High Risk List – Why not to Panic!
News that Mauritius was added to the EU list of high-risk third countries on 7 May 2020 has understandably caused much consternation amongst fund managers who have fund structures and investment holding vehicles domiciled in Mauritius. While this is certainly a cause of concern, the following should be borne in mind: This is not new. The Financial Action Task Force (FATF), the global inter-governmental body responsible for setting best practice standards and enhancing the implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other similar threats to the integrity international financial systems, placed Mauritius on its ‘grey list’ on 21 February 2020 (being ‘Jurisdictions under Increased Monitoring’). FATF “grey listing” is afforded to jurisdictions identified as having strategic deficiencies in their anti-money laundering and combating financing of terrorism (AML/CFT) regimes. The FATF has, as a result, placed Mauritius under increased monitoring. It is the FATF listing that has led to Mauritius being placed on the EU high risk list. The EU listing is not yet in force. The list is not final and needs to be submitted to the European Parliament and the EU Council of Ministers for approval, following which it will then become effective on 1 October 2020. Mauritius is committed to addressing the issue. Following the FATF grey listing, Mauritius immediately made a high-level political commitment to continue to work with the FATF to swiftly strengthen the effectiveness of its AML/CFT regime. It is either compliant or largely compliant with 35 out of the 40 FATF recommendations and it has already met the FAFT expectations in respect of the ‘Big Six Recommendations’. All indications are that Mauritius will address the FATF concerns swiftly in order to be removed from the FATF grey list (and consequently the EU list) as quickly as possible. There is a plan. The FATF Action Plan being implemented by Mauritius includes: (i) demonstrating that the supervisors of its global business sector implement risk-based supervision; (ii) ensuring access to accurate basic and beneficial ownership information by competent authorities in a timely manner; (iii) demonstrating that its law enforcement agencies have capacity to conduct money laundering investigations (including parallel financial investigations and complex cases); (iv) implementing a risk based approach for supervision of its non-profit organisation sector to prevent abuse for Terrorist Financing purposes, and (v) demonstrating the adequate implementation of targeted financial sanctions through outreach and supervision. In a communique from the Mauritian Ministry of Financial Services and Good Governance on 9 May this year, Mauritius reiterated its commitment to implementing the FATF Action Plan as soon as possible and a first progress report has already been sent to the FATF. It does not mean you have to move existing fund structures and companies. Once the list becomes effective, and for as long as the Mauritius is on the list, then, in terms of EU regulations, certain categories of EU financial services institution, credit institutions, banks, insurance companies, investment firms, trust and company service providers and the like will be required to apply enhanced customer due diligence with respect to business relationships or transactions involving Mauritius. Furthermore, persons and entities deploying EU funding or budgetary guarantees shall be prohibited from entering into new or renewed operations with entities incorporated or established in Mauritius, except when an action is physically implemented in Mauritius. Accordingly, while EU development finance institutions should continue to meet existing obligations to Mauritian-domiciled funds, they will avoid investing in any new Mauritian fund structures (or through Mauritian entities) until the AML/CFT compliance issues are resolved. Fund managers looking to raise capital from EU development finance institutions in the short-term may need to house such commitments in parallel funds in other acceptable jurisdictions (such as South Africa). Fund managers should also pay attention to “excuse” provisions inside letters with all investors when investing into or through Mauritian entities (not just EU investors given the FATF listing applies more broadly).
Memorandum of Cooperation
On 26 August 2020, the Bank of Mauritius has signed a Memorandum of Cooperation (‘Memorandum’) with local Anti-Money Laundering and Combatting the Financing of Terrorism (‘AML/CFT’) Supervisors. The Memorandum aims to facilitate policy formulation, exchange of information and operational coordination to effectively combat money laundering and the financing of terrorism and proliferation. For optimal implementation of the AML/CFT regime, an interagency Coordination Committee will be set up as per the Memorandum. The parties to the Memorandum are the Bank of Mauritius, the Attorney General’s Office, the Financial Services Commission, the Financial Intelligence Unit, the Registrar of Companies, the Gambling Regulatory Authority, the Registration of Associations, and the Mauritius Institute of Professional Accountants. The Memorandum is in line with the Financial Action Task Force’s standards and the imperatives of the National Strategy for Combatting Money Laundering and the Financing of Terrorism and Proliferation 2019-2022.
