PROLIFERATION FINANCING (PF) RISK ASSESSMENT
At its last virtual plenary meeting in October 2020, the Financial Action Task Force (FATF) adopted amendments to Recommendation 1 which now require countries and the private sector (financial institutions and DNFBPs) to identify, and assess the risks of potential breaches, non-implementation or evasion of the targeted financial sanctions related to proliferation financing and to take action to mitigate these risks. This document provides an overview of these amendments to Recommendation 1 of the FATF and suggestion on conducting a PF Risk Assessment.
The FATF Recommendations
The FATF Recommendations set out a comprehensive and consistent framework of measures which countries should implement in order to combat money laundering and terrorist financing, as well as the financing of proliferation of weapons of mass destruction. Countries have diverse legal, administrative and operational frameworks and different financial systems, and so cannot all take identical measures to counter these threats. Please refer to link below for further information: http://www.fatf-gafi.org/publications/fatfrecommendations/documents/fatf-recommendations.html
FATF to decide about Pakistan status this month
A virtual meeting of the Financial Action Task Force (FATF) plenary scheduled for Oct 21-23 will decide if Pakistan should be excluded from its ‘grey list’, based on a review of Islamabad’s performance to meet global commitments and standards on fight against money laundering and terror financing. The FATF plenary was earlier scheduled in June but Islamabad got an unexpected breather after the global watchdog against financial crimes temporarily postponed all mutual evaluations and follow-up deadlines in the wake of grave health risk following Covid-19 pandemic. The Paris-based agency also put a general pause in the review process, thus giving additional four months to Pakistan to meet the requirements. In February, the FATF had given Pakistan a four-month grace period to complete its 27-point action plan against ML&TF committed with the international community when it noted that Pakistan had delivered on 14 points but missed 13 other targets. On July 28, the government reported to parliament compliance with 14 points of the 27-point action plan and with 10 of the 40 recommendations of the FATF. Islamabad was placed on grey list in June 2018 due to ‘strategic deficiencies’ By Sept 16, however, the joint session of the parliament amended about 15 laws to upgrade its legal system matching international standards as required by the FATF. The government has already submitted its report to the FATF and its affiliated review groups and responded to their comments, detailing compliance with the 13 outstanding action points. Based on upgraded legislation, the authorities expect the ‘virtual meeting’ to describe Pakistan as ‘largely compliant’ on at least 10 action points even if it was not given a formal exit from the grey list though it would now depend on the FATF assessment. The FATF had announced in February that all deadlines given to Pakistan to complete 27-point action plan had expired and yet only 14 items had largely been completed leaving 13 unaccomplished targets. It strongly urged Pakistan to swiftly complete its full action plan by June 2020 or else it would be moved to the list of monitored jurisdiction, commonly known as blacklist. The plenary had formally placed Pakistan in the grey list in June 2018 due to ‘strategic deficiencies’ in its AML/CFT regime after a push from India supported by the US, the UK and some European countries. The Pakistan government then committed at the highest level to a 27-point action plan but failed to meet deadlines. The country’s compliance with the 13 remaining action points will be reviewed in eight key categories. The FATF will examine if the country had demonstrated remedial actions and sanctions applied in cases of AML/CFT violations, relating to terrorist financing (TF) risk management and TFS (terror financing sanctions) obligations. The FATF will also judge if competent authorities were cooperating and taking action to identify and taking enforcement action against illegal money or value transfer services (MVTS) and had proven implementation of cross-border currency and bearer negotiable instruments (BNI) controls at all ports of entry, including applying effective, proportionate and dissuasive sanctions. Pakistan has also to determine if law enforcement agencies (LEAs) were identifying and investigating the widest range of terror financing activity and that TF investigations and prosecution target designated persons and entities, and those acting on behalf or at the direction of the designated persons or entities besides showing TF prosecutions result in effective, proportionate and dissuasive sanctions. The country’s outstanding action areas also include effective implementation of targeted financial sanctions (supported by a comprehensive legal obligation) against all 1,267 and 1,373 designated terrorists and those acting for or on their behalf, including preventing the raising and moving of funds, identifying and freezing assets (movable and immovable), and prohibiting access to funds and financial services. Pakistan’s performance will also be under scrutiny at the virtual meetings later this month on enforcement against TFS violations including administrative and criminal penalties and provincial and federal authorities cooperating on enforcement cases and whether facilities and services owned or controlled by designated person were deprived of their resources and the usage of the resources.
Mauritius determined to promptly get off EU Blacklist
Mauritius has set in motion an action plan for it to be removed from the EU blacklist within the briefest possible delay. The regulatory framework of the jurisdiction is being reinforced to ensure that all recommendations of the Financial Action Task Force (FATF) to combat money laundering are strictly adhered to. A Financial Offences Court is being set up amongst other measures included in the action plan. Mauritius is known for its high legal and ethical standards and is determined to restore its reputation as a jurisdiction.
India-focused funds may soon get fast approval from Mauritius
Mauritius had been taking a bit longer to greenlight India-focused funds in the recent past, with the country’s financial services regulator busy in activities aimed at exiting the grey and black lists of the Financial Action Task Force (FATF) and the European Union (EU), respectively. That may be about to change as Mauritius is done with most of its submissions and progress reports. “After the EU’s decision to include it in the list of “high-risk” countries, the Financial Services Commission (Mauritius) has presumably taken a number of steps that include a thorough inspection of funds, holding companies and SPVs (special purpose vehicles) and implementing the new AML/CFT (anti-money laundering/countering the financing of terrorism) regulations. While the FSC’s efforts are in the right direction, there have been delays in processing new fund applications. In May, the EU included Mauritius in its revised list of high-risk nations with strategic deficiencies in their AML/CFT frameworks. In February, Mauritius was included in the “grey list” of jurisdictions that require increased monitoring by the FATF. Jurisdictions under increased monitoring actively work to address strategic deficiencies in their regimes. These are done to counter money-laundering, terrorist financing, and proliferation financing in a more efficient manner. Market observers also said the approvals depended a lot on the funds themselves, and the extent to which they followed the new norms introduced last year. The FSC had tightened rules for processing India-focused applications that included thorough checks on KYC information of new fund applications, as well as extensive background checks on fund sponsors and fund managers. The FSC was also reaching out to regulators of countries in which these sponsors or managers are based to verify their antecedents. In terms of processing time, by and large, the licences have been issued within the FSC SLA of four-six weeks from the date of submission.
Red Flag Indicators for AML-CFT
Money laundering hurts in many ways. Money laundering not only hides the revenues of criminals’ illegal activities, but it can also harm the economy and pose many risks to your business. Allowing money laundering through your business may be prone to difficulties in managing your assets. You may encounter high legal costs if the authorities find that your money laundering operation is taking place or the rules are not followed. As a result, millions of ‘dirty’ dollars are laundered every year. It is important to be aware of the red flag indicators accompanying illegal activity to prevent this situation. What Is the Mean of Red Flag Indicators for AML-CTF? It is important to be aware of and act in accordance with the red flag indications that a transaction may be suspect. In some cases, you may need to inquire more about your customers. If your customer questions do not resolve your doubts, the Money Laundering Reporting Officer (MLRO) should decide whether this should be done for the Suspicious Transaction Report (STR) and, if necessary, be presented to the Financial Intelligence Unit (FIU) Red flag indicators also help financial institutions to apply a risk-based approach to CDD requirements, such as knowing who the beneficiaries are and understanding the source of the funds used. If there is a red flag indicator, regulators may suspect that money laundering (ML) or terrorist financing (TF) has occurred. SRBs and law enforcement officers find these red-flag indicators useful when monitoring or researching the professional behavior of professionals or customers. The Financial Action Task Force FATF Report also highlighted the following Red Flags in the Funding Fund for Money Laundering and Terrorism. Red Flags About the Client Red flag 1: The client is overly secret or evasive about: who the client is what the big picture is where the money is coming from who the beneficial owner is why they are doing this transaction this way Red flag 2: Client: actively avoiding personal contact without goodwill. refuses to provide information, data, and the necessary documents provides fake documents uses an email address that cannot be found on the Internet a partner associated or known or known to a person involved in or suspected of terrorist or terrorist financing activities asks repeated questions about procedures for implementing standards Red flag 3: Parties: Parties or their representatives are located in a high-risk country. The parties to the transaction are tied for no apparent commercial reason. The links between the parties of a family, employment, institution, or any other nature raise doubts about reality. In a short time, the same parties have more than one view of transactions. The transaction is unusual for the processing parties, especially if the age is below the legal age. The person who actually directs the operation is not one of the official parties of the transaction or its representatives. A real person working as a director or representative is not an appropriate representative. Red Flags ın the Source of Funds Red Flag 4: The transaction is especially inconsistent with the individual’s socio-economic profile Red flag 5: If the client or third party contributes a substantial amount of cash as collateral provided by the borrower, without making a logical statement, instead of just using these funds directly. Red flag 6: If the funding source is unusual Red flag 7: If the customer uses more than one bank account or foreign account Red flag 8: If a company, business or government finance private spending Red flag 9: If the choice of payment method has been postponed to a very close time to the notarization time without a logical explanation Red flag 10: If an unusually short payback period is specified without any logical explanation Red flag 11: Mortgages are repaid substantially without a reasonable explanation before the first due date Red Flag 12: If the asset is purchased in cash and then quickly used as a guarantee for the loan Red flag 13: If there is a request to change the previously agreed payment procedures without a reasonable explanation Red Flag 14: Financing is provided by a lender without a logical explanation outside the credit institution Red Flag 15: The collateral provided for the transaction is currently located in a high-risk country Red flag 16: If there has been a significant increase or consecutive contributions to the same company without a logical statement to the same company recently. Red Flag 17: If there is an unrelated or high-risk increase from the capital, company, from a foreign country Red flag 18: If the company has received a fairly high injection of capital or assets Red flag 19: If there is an excessively high or low price for the securities transferred, for any situation showing such an excess Red flag 20: Especially if recently created companies also made large financial transactions without justified rea Red Flags ın the Choıce of Lawyer Red flag 21: Training of a lawyer away from the transaction without a legal or economic reason. Red flag 22: Education of a lawyer who does not have experience in a particular area of expertise. Red Flag 23: The client is ready to pay significantly higher wages than usual without a legitimate reason. Red flag 24: The client changed the consultant several times in a short time, or met with multiple legal counsels without a valid reason. Red flag 25: Required service was denied by another professional. Red Flags ın the Nature of the Retainer Red flag 26: In an illegal operation Red flag 27: Suspicious statements of the customer or his professional or non-commercial activities Red flag 28: Creation of complex ownership structures when there is no legitimate or economic cause. Red flag 29: Participation of the client’s structures with more than one country without a legitimate or economic cause. Red flag 30: Incorporation and purchase of stock or securities of several companies, enterprises, or legal entities within a short period of time with elements in common with no logical explanation. Red flag 31: There are no documents to support the customer’s story, previous transactions, or company activities. Red flag 32: There are a few elements common to a series of transactions within a short time without
FATF statement following unauthorised disclosure of confidential FinCEN documents
The FATF is aware of press reports about the disclosure of suspicious activity reports (SARs) documents filed by financial institutions with the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). We will not comment on information from SARs or suspicious transaction reports (STRs), which is confidential information under the FATF standards. Irrespective of this, the FATF emphasises the importance for all countries to fully and effectively implement the FATF standards and for the private sector to fulfil its responsibility to detect and help prevent money laundering and terrorist financing, which includes filing suspicious transactions reports with competent authorities. In supporting the fight against money laundering, terrorism financing and proliferation financing, the FATF has not only developed robust standards that over 200 countries and jurisdictions have agreed to comply with, but initiated multiple projects in recent years to improve the efficiency of anti-money laundering prevention systems. The FATF’s work helps ensure a co-ordinated global response to prevent organised crime, corruption and terrorism in which both the public and private sectors have important roles to play.
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).
Terrorist Financing Risk Assessment for the NPO Sector in Mauritius
The risk assessment identified the following six types of NPOs as meeting the FATF definition of NPOs Nature of the TF Threat to NPOs in Mauritius 1. The abuse of NPOs to promote extremist ideologies. 2. The abuse of NPOs to finance or facilitate foreign terrorist fighters. 3. The abuse of NPOs to finance terrorism overseas. Six features, characteristics or activities were identified which increase the risk of TF abuse amongst NPOs in Mauritius. NPOs and NPO activities likely to be at increased risk of TF abuse 1. Cross border movement of funds. 2. Alternative sources of funds and remittance systems. 3. Involvement in complex international transactions or structures. 4. Cash fund-raising from anonymous sources. 5. Ethnic or religious activities. 6. Charitable Trusts.
Mauritius, a safe haven monitored by the Financial Action Task Force
The Financial Action Task Force (FATF), also known by its French name Groupe d’action financière is an intergovernmental organization that was founded in 1989. It was established to implement international standards, to develop and promote policies at national and international levels and to combat money laundering and the financing of terrorism. On the 21st of February 2020, Mauritius was placed on the institution’s “Jurisdictions under Increased Monitoring” list. Following this, the FATF has recognized that the island has taken several measures to improve the transparency of legal persons by amending the legal framework to require them to disclose beneficial ownership information and improve the processes for identifying and confiscating proceeds of crimes. Security measures undertaken by Mauritius Throughout the years, Mauritius has made significant efforts to increase the efficiency level of its AntiMoney Laundering and Countering the Financing of Terrorism (AML/CFT) system. Some of these are: completing its National Risk Assessment, enhancing domestic coordination and international cooperation, developing and implementing an AML/CFT risk-based supervision framework for financial institutions, the implementation of the United Nations targeted financial sanctions related to terrorism and proliferation. Mauritius has been fully committed the implementation of its Action Plan. As the time of writing, it has been able to address 53 out of the 58 Recommended Actions identified in the Mutual Evaluation Report (MER) to improve the efficiency level of its AML/CFT system. While the island is in its ‘increased monitoring’ phase, the FSC is continuously and actively working with the government, industry stakeholders and the FATF to address the remaining action items. It is committed to resolve these issues swiftly within or before the agreed timelines. While the FATF does not call for the application of enhanced due diligence to be applied to jurisdictions such as Mauritius, even if they are placed on the “Jurisdictions under Increased Monitoring” list, it encourages its members to take into account the information presented on that jurisdiction in their risk analysis. Should you be worried about the FATF’s “Jurisdictions under Increased Monitoring” list? After the publication of the list by the Financial Action Task Force, there have been some apprehensions amongst market participant regarding whether the inclusion of Mauritius would have any repercussions. However, they have no reason to worry since the country has already addressed the necessary issues. Moreover, the FSC is prioritizing its work to address all the action points recommended for the Global Business sector ahead of the set timeline. This work is focused on demonstrating the implementation of risk-based supervision of the global business sector by way of a comprehensive onsite inspection schedule and taking enforcement action against non-compliance. As such, Mauritius remains completely committed to uphold the integrity of the domestic and international financial system. If you wish to have more information on the finance sector of Mauritius or the benefits of establishing a company in the country, feel free to contact us. Our team is available to answer your questions and to help you establish, manage and administer companies, trusts, foundations and funds according to your needs.
