Financial Action Task Force FATF 40 Recommendations FATF

Financial Action Task Force (FATF 40 Recommendations)

FATF Standards � International Instruments � FATF is an inter-governmental policy-making body established in 1989 � 36 Members, 08 FSRBs & 25 Observer Organizations � FATF Standards are applied in 180 Countries/Jurisdictions � FATF Recommendations were first issued in 1990, then revised in 1996, 2001, 2003 and most recently in 2012 � New 40 Recommendations (Previously 40+9 )

FATF 40 RECOMMENDATIONS � International Instruments � FATF is an inter-governmental policy- making body established in 1989 � 36 Members, 08 FSRBs & 25 Observer Organizations � FATF Standards are applied in 180 Countries/Jurisdictions � Recommendations first issued in 1990; revised in 1996, 2003 and 2012. Interpretative Notes added. � After 9/11, FATF adopted Nine(9) Special Recommendations on Terrorist Financing 3 � 2012 revisions combined the Nine(9) Special Recommendations into the 40 Recommendations

Key Changes to the Standards � Risk Based Approach (RBA): integration of RBA throughout preventive measures, identification & assessment of ML/TF risks. � Transparency: beneficial ownership of legal persons and arrangements and wire transfer parties.

Key Changes to the Standards � International Cooperation: enhanced the scope and application of international cooperation between authorities for investigative, supervisory and prosecutorial purposes. � Operational Standards: v Expansion of Law enforcement and FIUs standards v Measures according to National AML/CFT Strategy v Without delay, identifying, tracing and initiating freezing and seizing property being or suspected to be the POC.

Key Changes to the Standards � New Threats & New Priorities: v Financing of Proliferation (UNSCRs 1718 and 1737 on Iran) v Corruption & Politically Exposed Persons (coverage of domestic PEPs, family members and close associates) v Tax Crimes � Terrorist Financing: integrated ML/TF measures

Key Changes to the Standards �Clarifying obligations: v clearer requirements for financial groups (group-wide AML/CFT risk management and info sharing & concession on CDD for intragroup referrals) v greater clarity on procedures to identify beneficial ownership v CDD /record keeping requirement by law �FATF Glossary and Interpretative Notes have also been revised

New Structure of the FATF Recommendations Category Description 40 Standards A AML/CFT Policies And Coordination 1, 2 B Money Laundering and Confiscation 3, 4 C Terrorist Financing and Financing of Proliferation 5, 6, 7, 8 D Preventive Measures 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 21, 22, 23 E Transparency and Beneficial Ownership of Legal Persons and Arrangements 24, 25 F Powers and Responsibilities of Competent Authorities and other Institutional Measures 26, 27, 28, 29, 30, 31, 32, 33, 34, 35 G International Cooperation 36, 37, 38, 39, 40

A. AML/CFT Policies And Coordination Rec. 1: Assessing risks and applying a risk-based approach � Countries should identify, assess, and understand the ML/TF risks for the country � Designation of an authority or mechanism to coordinate actions to assess risks, and apply resources, aimed at ensuring the risks are mitigated effectively. � Countries should apply a risk-based approach (RBA) in accordance with risks identified. � This approach should be an essential foundation to efficient allocation of resources across the AML/CFT regime � Countries should require financial institutions and designated non-financial businesses and professions (DNFBPs) to identify, assess and take effective action to

A. AML/CFT Policies And Coordination Rec. 2: National cooperation and coordination �Countries should have national AML/CFT policies & designate an authority or have a coordination or other mechanism that is responsible for such policies. �Effective domestic coordination among policymakers, FIU, LEAs, supervisors and other relevant competent authorities, concerning the development and implementation of policies and activities to combat ML/TF and the financing of proliferation of WMD.

B. MONEY LAUNDERING & CONFISCATION Rec. 3: Money laundering offence �Criminalize ML on the basis of the Vienna Convention and the Palermo Convention and apply the crime of money laundering to all serious offences, with a view to including the widest range of predicate offences. Rec. 4: Confiscation and provisional measures �Freeze or seize and confiscate POC and property involved in TF financing of proliferation of WMD without prejudicing the rights of bona fide third

C. TERRORIST FINANCING AND FINANCING OF PROLIFERATION Rec. 5: Terrorist financing offence �Criminalize TF on the basis of the TF Convention, and should criminalize not only the financing of terrorist acts but also the financing of terrorist organizations and individual terrorists even in the absence of a link to a specific terrorist act or acts. �Designated as ML predicate offences as well.

C. TERRORIST FINANCING AND FINANCING OF PROLIFERATION Rec. 6: Targeted financial sanctions related to terrorism and terrorist financing �Targeted financial sanctions regimes to comply with UNSC resolutions relating to the prevention and suppression of terrorism and terrorist financing. � 1267 (1999) and its successor Resolutions and resolution 1373 (2001).

C. TERRORIST FINANCING AND FINANCING OF PROLIFERATION Rec. 7: Targeted financial sanctions related to proliferation �Targeted financial sanctions to comply with UNSC resolutions relating to the prevention, suppression and disruption of proliferation of WMD. Rec. 8: Non-profit organizations �Countries should review the adequacy of laws and regulations that relate to entities that can be abused for the financing of terrorism

D. PREVENTIVE MEASURES Rec. 9: Financial institution secrecy laws �Countries should ensure that financial institution secrecy laws do not inhibit implementation of the FATF Recommendations. Rec. 10: Customer due diligence �prohibited from keeping anonymous accounts �Undertaking CDD in given situations �CDD should be required by law

D. PREVENTIVE MEASURES Rec. 10: Customer due diligence �The CDD measures should include a) Identifying the customer and verifying that customer’s b) Identifying the beneficial owner and taking reasonable measures to verify the identity of the beneficial owner c) Understanding and, as appropriate, obtaining information on the purpose and intended nature of the business relationship d) Conducting ongoing due diligence on the business relationship and scrutiny of transactions

D. PREVENTIVE MEASURES Rec. 11: Record-keeping � Identification & CDD records for 05 years � Record keeping to be required by law � Availability to domestic authorities as per law Rec. 12: Politically exposed persons � Coverage of foreign and domestic PEPs (family members or close associates) � In addition to performing normal CDD a) have appropriate risk-management systems to determine whether the customer or the beneficial owner is a PEP; b) obtain senior management approval for establishing (or continuing, for existing customers) such business relationships; c) take reasonable measures to establish the source of wealth and source of funds; and d) conduct enhanced ongoing monitoring of the business relationship

D. PREVENTIVE MEASURES Rec. 13: Correspondent banking �In addition to performing normal customer due diligence measures a) gather sufficient information about a respondent institution b) assess the respondent institution’s AML/CFT controls c) obtain approval from senior management before establishing new correspondent Relationships d) clearly understand the respective responsibilities of each institution; and e) Ensure that respondent bank has conducted CDD “payable-through accounts”

D. PREVENTIVE MEASURES Rec. 14: Money or value transfer services �Countries should ensure that MVTS are licensed or registered and subject to effective systems for monitoring and ensuring compliance with the relevant measures called for in the FATF Recommendations �Identify and sanction unlicensed MVTS

D. PREVENTIVE MEASURES Rec. 15: New technologies �Identify and assess the ML/TF risks that may arise in relation to (a) the development of new products and new business practices, including new delivery mechanisms, and (b) the use of new or developing technologies for both new and pre-existing products. �Such a risk assessment should take place prior to the launch of the new products, business practices or the use of new or developing technologies. �Appropriate measures to manage and mitigate those risks.

D. PREVENTIVE MEASURES Rec. 16: Wire transfers �Accurate originator information, and required beneficiary information through out payment chain �FIs should monitor wire transfers for the purpose of detecting those which lack required originator and/or beneficiary information �FIs should take freezing action and should prohibit conducting transactions with designated persons and entities under UNSRs

D. PREVENTIVE MEASURES Rec. 17: Reliance on third parties � FIs may rely on third parties to perform CDD or to introduce business. � The ultimate responsibility for CDD measures remains with the FI relying on the third party. Rec. 18: Internal controls and foreign branches and subsidiaries � Group-wide programs against ML/TF including policies and procedures for sharing information within the group for AML/CFT purposes � Foreign branches and subsidiaries should apply AML/CFT measures consistent with the home country.

D. PREVENTIVE MEASURES Rec. 19: Higher-risk countries �Enhanced due diligence (EDD) measures to business relationships and transactions and FIs from countries for which this is called for by the FATF. �Countermeasures when called upon to do so by the FATF

D. PREVENTIVE MEASURES Rec. 20: Reporting of suspicious transactions �FIs should be required, by law, to report promptly its suspicions to the FIU. Rec. 21: Tipping-off and confidentiality �FIs, their directors, officers and employees should be: a) protected by law from criminal and civil liability if they report their suspicions in good faith to the FIU b) prohibited by law from disclosing (“tipping-off”) the fact that a STR or related information is being filed with the FIU.

D. PREVENTIVE MEASURES Rec. 22 & 23: DNFBPs: customer due diligence �The CDD and record-keeping requirements set out in Recommendations 10, 11, 12, 15, and 17, apply to DNFBPs a) Casinos b) Real estate agents c) Dealers in precious metals and precious stones d) Lawyers, notaries, other independent legal professionals and accountants e) Trust and company service providers

E. TRANSPARENCY AND BENEFICIAL OWNERSHIP OF LEGAL PERSONS AND ARRANGEMENTS Rec. 24 & 25: Transparency and beneficial ownership of legal persons/legal arrangements � Prevent the misuse of legal persons for ML/TF. � Adequate, accurate and timely information on the beneficial ownership and control of legal persons. � Avoid misuse of legal persons that may issue bearer shares or bearer share warrants, or which allow nominee shareholders or nominee directors.

F. POWERS AND RESPONSIBILITIES OF COMPETENT AUTHORITIES, AND OTHER INSTITUTIONAL MEASURES Rec. 26: Regulation and supervision of financial institutions �FIs are subject to adequate regulation and supervision and are effectively implementing FATF Standards �Prevent criminals to hold or become beneficial owner of FIs. �Basel Core Principles-consolidated group supervision for AML/CFT purposes

F. POWERS AND RESPONSIBILITIES OF COMPETENT AUTHORITIES, AND OTHER INSTITUTIONAL MEASURES Rec. 27: Powers of supervisors �Adequate powers to supervise or monitor/inspect, and ensure compliance with the requirements to combat ML/TF �Calling any information and to impose sanctions �Powers to impose a range of disciplinary and financial sanctions, including the power to withdraw, restrict or suspend the FIs license, where applicable.

F. POWERS AND RESPONSIBILITIES OF COMPETENT AUTHORITIES, AND OTHER INSTITUTIONAL MEASURES Rec. 28: Regulation and supervision of DNFBPs �DNFBPs should be subject to regulatory and supervisory measures (Casinos should be licensed and supervised) Rec. 29: Financial intelligence units �national centre for the receipt and analysis of: (a) STRs; and (b) other information relevant to money laundering, associated predicate offences and terrorist financing, and for the dissemination of the results of that analysis. �Able to obtain additional information from reporting entities, and should have access on a timely basis to

F. POWERS AND RESPONSIBILITIES OF COMPETENT AUTHORITIES, AND OTHER INSTITUTIONAL MEASURES Rec. 30: Responsibilities of law enforcement and investigative authorities �Designated LEAs have responsibility for ML and TF investigations within the framework of national AML/CFT policies. �Pro-active parallel financial investigation �Responsibility for expeditiously identifying, tracing and initiating actions to freeze and seize property that is, or may become, subject to confiscation, or is suspected of being POC �Cooperative investigations with appropriate competent authorities in other countries

F. POWERS AND RESPONSIBILITIES OF COMPETENT AUTHORITIES, AND OTHER INSTITUTIONAL MEASURES Rec. 31: Powers of law enforcement and investigative authorities �Powers to use compulsory measures for the production of records held by FIs �Able to use a wide range of investigative techniques suitable for the investigation of ML and TF �Effective mechanisms in place to identify, in a timely manner, whether natural or legal persons hold or control accounts �Able to ask for relevant information held by FIU

F. POWERS AND RESPONSIBILITIES OF COMPETENT AUTHORITIES, AND OTHER INSTITUTIONAL MEASURES Rec. 32: Cash couriers �Detect the physical cross-border transportation of currency and bearer negotiable instruments (BNIs), including through a declaration system and/or disclosure system �Legal authority to stop or restrain currency or BNIs that are suspected to be related to TF, ML predicate offences �Effective, proportionate and dissuasive sanctions for false declaration(s) or disclosure(s).

F. POWERS AND RESPONSIBILITIES OF COMPETENT AUTHORITIES, AND OTHER INSTITUTIONAL MEASURES Rec. 33: Statistics �Maintain comprehensive statistics on matters relevant to the effectiveness and efficiency of their AML/CFT systems �Statistics on the STRs received and disseminated; on ML and TF investigations, prosecutions and convictions; on property frozen, seized and confiscated; and on mutual legal assistance or other international requests for cooperation.

F. POWERS AND RESPONSIBILITIES OF COMPETENT AUTHORITIES, AND OTHER INSTITUTIONAL MEASURES Rec. 34: Guidance and feedback � The competent authorities, supervisors should establish guidelines, and provide feedback, which will assist FIs and DNFBPs in applying national measures to ML and TF, and, in particular, in detecting and reporting STRs. Rec. 35: Sanctions � A range of effective, proportionate dissuasive with natural or legal persons covered by Recommendations 6, and 8 to 23, that fail to comply with AML/CFT requirements. � Sanctions not only to FIs and DNFBPs, but also to their directors and senior management.

G. INTERNATIONAL COOPERATION Rec. 36: International instruments � Countries should take immediate steps to become party to and implement fully the: a) Vienna Convention, 1988; b) the Palermo Convention, 2000; c) the United Nations Convention against Corruption, 2003; d) the Terrorist Financing Convention, 1999.

G. INTERNATIONAL COOPERATION Rec. 36: International instruments (contd…) �Where applicable, countries are also encouraged to ratify and implement other relevant international conventions, such as the a) Council of Europe Convention on Cybercrime, 2001; b) the Inter-American Convention against Terrorism, 2002; c) and the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime and on the

G. INTERNATIONAL COOPERATION Rec. 37: Mutual legal assistance �Widest possible range of mutual legal assistance in relation to ML, associated predicate offences and TF investigations, prosecutions, and related proceedings �Adequate legal basis for providing assistance and, where appropriate, should have in place treaties, arrangements or other mechanisms to enhance cooperation

G. INTERNATIONAL COOPERATION Rec. 38: Mutual legal assistance: freezing and confiscation �Expeditious action in response to requests by foreign countries to identify, freeze, seize and confiscate property laundered; proceeds from ML, predicate offences and TF �Non-conviction-based confiscation proceedings and related provisional measures, unless this is inconsistent with fundamental principles of their domestic law �Effective mechanisms for managing such property including the sharing of confiscated assets

G. INTERNATIONAL COOPERATION Rec. 39: Extradition � Constructively and effectively execute extradition requests in relation to ML and TF, without undue delay � Do not provide safe havens for individuals charged with the TF, terrorist acts or terrorist organizations � Each country should either extradite its own nationals or prosecute the domestically � In particular, countries should: a) ensure ML and TF are extraditable offences; b) ensure that they have clear and efficient processes for the timely execution of extradition requests including prioritization where appropriate. c) not place unreasonable or unduly restrictive conditions on the execution of requests; and d) ensure they have an adequate legal framework for extradition.

G. INTERNATIONAL COOPERATION Rec. 40: Other forms of international cooperation �Competent authorities can rapidly, constructively and effectively provide the widest range of international cooperation in relation to ML and TF �Spontaneously and upon request, and there should be a lawful basis �MOU should be negotiated and signed in a timely way with the widest range of foreign counterparts �clear channels or mechanisms for the effective transmission and execution of requests

Overview of Mutual Evaluation � The process of evaluating jurisdictions AML/CFT regime on the touchstone of Financial Action Task Force (FATF) 40 Recommendations. � The overriding objective is to protect the international financial system hence contribute toward safety and security of the members.

Mutual Evaluation 2018 Pakistan joined (Asia Pacific Group) APG in 2000 �First evaluation – December 2004 - Adopted in APG in July 2005 �Second evaluation - January/February 2009 - Adopted in APG July 2009 (joint with World Bank) �Third evaluation – mid- to late 2018 -This is under process 42

Overview of Assessment Methodology Technical Compliance � Specific technical requirements in place as per FATF Recommendations � Snap shot at the time of the on-site Examples: Whether the necessary laws, regulations and the supporting AML/CFT institutional framework is in place. Effectiveness � Extent to which Immediate Outcomes are achieved � A holistic approach – how all the component parts of a system work together � whether the AML/CFT controls are effectively working, and the extent to which the country is achieving the defined set of outcomes. 43

Ratings Technical Compliance � Compliant � Largely compliant � Partially compliant � Non-compliant � Not applicable Effectiveness � High � Substantial � Moderate � Low 44

National Risk Assessment on ML/TF �NEC in Feb 2015 approved to carry-out NRA with the assistance of World Bank. �Pakistan initiated NRA in Mid 2015. �Working Groups were formed comprising AML/CFT Stakeholders. �DG FMU was nominated as NRA Coordinator �The National Risk Assessment (NRA) exercise was completed in February 2017 and the report was approved by the Chairman NEC. 45

NRA Modules �Module 1 - ML Threat Analysis �Module 2 - ML National Vulnerability �Module 3 - ML Banking Sector �Module 4 - ML Securities Sector �Module 5 - ML Insurance Sector �Module 6 - ML Other Financial Institutions �Module 7 - ML DNFBPs �Module 8 - TF Risk Assessment �Module 9 – Financial Inclusion 46

NRA Contributors � Anti-Narcotics Force � Federal Board of Revenue � Federal Investigating Agency � Financial Monitoring Unit � Ministry of Finance � Ministry of Foreign Affairs � Ministry of Interior � Ministry of Law and Justice � National Accountability Bureau � National Counter Terrorism Agency � Securities and Exchange Commission of Pakistan � State Bank of Pakistan 47 � Reporting Entities

Module 1 - ML Threat Analysis Based on the statistics, reviews and deliberations during the NRA process, following major predicate offences (Threats) identified in relation to the ML offence: �Corruption, �Smuggling (all types), �Drugs Trafficking, �Cheating & Fraud, �Kidnapping for Ransom, �Extortion, �Illegal Arms Sale, and 48 �Hawala/Hundi.

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