Regulating and Combating Money Laundering and Terrorist Financing

The Law in Emerging Economies

Nkechikwu Valerie Azinge, Nkechikwu Azinge-Egbiri

• Publisher: Routledge
• Year: 2021
• Print ISBN: 9780367703035
• eBook ISBN: 9781000351750
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Derecho mercantil

This book analytically reviews the impact of the global anti-money laundering and counter-terrorist financing (AML/CFT) framework on the compliance trajectory of a number of jurisdictions to this framework.

The work begins by examining the international financial sector reform and its evolution to inculcate the global framework for AML/CFT regulations. It challenges the resulting uniform AML/CFT due to its paradoxical impact on the compliance trajectory of African countries and emerging economies (ACs/EEs). This is done through an examination of the pre-conditions for effective regulation and compliance drivers for ACs/EEs that reveals the behavioural impact of the AML/CFT standards on the bloc of countries. Through the application of agency theory, it explores the relationship between ACs/EEs on the one hand and the international financial institutions that formulate, disseminate and facilitate compliance with the global framework for AML/CFT standards on the other. The remaining chapters review empirically the compliance pressures and resulting compliance trajectory of ACs/EEs with the AML/CFT standards. The final part of the book provides a detailed explanation of the compliance challenges of ACs/EEs and the legitimacy concerns that facilitate this.

This book offers a new direction on the impact of global AML/CFT standards on ACs/EEs and contributes to the understanding of the conditions under which the global standards are likely to facilitate proactive compliance within these blocs of countries. As such it will be a valuable resource for academics, researchers and policy-makers working in this area.

1 Compliance with the Global Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) Regulation

Parameters and Paradoxes of Regulation in African Countries and Emerging Economies (AC/EEs)

Introduction

Whilst African Countries (ACs) struggle with compliance with the AML/CFT regulations enunciated by the Financial Action Task Force (FATF), emerging economies (EEs) record better compliance levels. This is irrespective of the similar socio-economic and political challenges facing these countries. The difficulties faced by ACs in achieving meaningful AML/CFT compliance levels is unsettling, coming at a time when ACs are striving towards global financial integration demonstrably evidenced by their persistent economic growth.¹

1 AfDB, ‘Africa’s Economic Performance Improves in 2017’ (AfDB, 12 October 2017) <https://www.afdb.org/en/news-and-events/africas-economic-performance-improves-in-2017-17424/ > accessed 10 January 2018.

Surprisingly, the drive for improved AML/CFT compliance by ACs usually fosters a regulatory paradox. For instance, the FATF’s standard on customer due diligence (CDD) compels financial institutions to ‘identify the customer and verify that customer’s identity using reliable, independent source documents, data or information’.² On its face value, this requirement appears logically framed, but in ACs a large percentage of the population are excluded from mainstream consumer banking due to lack of acceptable identification documentation largely driven by illiteracy, unemployment and poverty.³ Hence, the strict enforcement of CDD would only heighten financial exclusion,⁴ which is antithetical to the FATF’s financial integrity objective.

2 FATF, ‘FATF Recommendations’ (FATF, 2012) <http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF%20Recommendations%202012.pdf8gt; accessed 10 January 2018.

3 The regulatory circular mandates that no formal identification is necessary for accounts with amounts below 200,000 naira (in Nigeria). In practice, this is hardly the case. See CBN, ‘Circular to All Banks and Other Financial Institutions: Implementation of Three-tiered Know Your Customer Requirements’ (Central Bank of Nigeria, 18 January 2013) <https://www.cbn.gov.ng/out/2013/ccd/3%20tiered%20kyc%20requirements.pdf8gt; accessed 30 July 2017; FATF, ‘FATF Guidance: Anti-Money Laundering and Terrorist Financing Measures and Financial Inclusion – With a Supplement on Customer Due Diligence’ (FATF Guidance, November 2017) <https://www.fatf-gafi.org/media/fatf/content/images/Updated-2017-FATF-2013-Guidance.pdf8gt; accessed 10 March 2018.

4 Ibid.

More broadly, the FATF recommendations are expected to trigger regulatory law reforms even in jurisdictions where the legal structures are deemed inefficient. FATF recommendation 4 states that ‘Countries should adopt measures similar to those set forth in the Vienna and Palermo Convention, and the Terrorist Financing Convention, including legislative measures’.⁵ However, anecdotal evidence and statistical findings reveal that developing (especially African) countries struggle with harnessing these standards.⁶ This is attributable to weak legal structures underpinned by socio-economic and political limitations peculiar to these states.

5 FATF (n 2) recommendation 4.

6 Concepcion Verdugo Yepes, ‘Compliance with The AML/CFT International Standard: Lessons from A Cross-Country Analysis’ (2011) International Monetary Fund Working Paper WP/11/177, 9 <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=18995788gt; accessed 19 April 2015.

The complexities involved in ACs’ attainment of compliance is further heightened by the FATF’s perception that the global financial system is only as strong as its weakest link and hence all countries should be equally subject to the FATF’s requirement.⁷ Scholars have supported this assertion, arguing that it is paramount for all countries to inculcate the FATF’s global standard for combating illicit crimes⁸ particularly as the borderless nature of money laundering (ML)⁹ and terrorist financing (TF)¹⁰ reinforces the need for an internationally coordinated response.¹¹ Furthermore, scholars argue that the various methods by which illicit crimes are carried out remain shrouded in secrecy, therefore uncurtailed liberalisation of ACs/EEs’¹² market economies can give rise to adverse socio-economic effects,¹³ as these crimes pose a threat to the stability of the financial system.¹⁴ However, requiring that all countries meet the same AML/CFT standard douses regulatory effectiveness and creates a paradox. Moreover, this approach is blindsided to the threat posed to the sovereignty of countries.¹⁵

7 Paul Allan Schott, ‘Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism: Second Edition and Supplement on Special Recommendation IX’ (World Bank, 2016) <https://openknowledge.worldbank.org/bitstream/handle/10986/6977/350520Referenc1Money01OFFICIAL0USE1.pdf?sequence=18#x0026;isAllowed=y8gt; accessed 10 December 2017.

8 Ibid.

9 FATF, ‘What is Money Laundering?’ <http://www.fatf-gafi.org/faq/moneylaundering/8gt; accessed 10 February 2015.; Nicholas Ryder, Financial Crime in the 21st Century, Law and Policy (Edward Publishing Limited 2011) 10.; Eleni Tsingou, ‘Global Financial Governance and the Developing Anti-Money Laundering Regime: What Lessons for International Political Economy’ (2005) Centre for the Study of Globalization and Regionalization (CSGR) Working Paper No 161/05 <http://wrap.warwick.ac.uk/1959/1/WRAP_Tsingou_wp16105.pdf8gt; accessed 11 February 2015.

10 Ilias Bantekas, ‘The International Law of Terrorist Financing’ [2003] 97 AJIL 315, 315.

11 Michael Barnett and Martha Finnemore, Rules for the World: International Organizations in Global Politics (CUP 2004) 9.

12 Tsingou (n 9).

13 Paul Ashin, ‘Dirty Money, Real Pain’ [2012] 49 (2) Finance and Development 38, 38.; Raul Hernández-Coss, Chinyere Egwuagu, Jennifer Isern and David Porteus, ‘AML/CFT Regulation: Implications for Financial Service Providers that Serve Low-income People’ (2005) The International Bank for Reconstruction and Development/The World Bank, 14 <http://documents.worldbank.org/curated/en/497161468140979952/pdf/361690AML0CFT0regulation01PUBLIC1.pdf8gt; accessed June 12 2012.; See the website of the United Nations Office on Drugs and Crime (UNODC) <www.odccp.org> accessed 10 January 2015.

14 Saby Ghoshray, ‘Compliance Convergence in FATF Rulemaking: The Conflict Between Agency Capture and Soft Law’ [2014–2015] 59 N.Y.L. Sch. L. Rev. 521, 533.

15 Herbert Morais, ‘The Quest for International Standards: Global Governance vs. Sovereignty’ [2001] 50 U. Kan. L. Rev. 779, 779.

A background to the coordinated response to illicit crimes provides a synopsis to the quagmire faced by ACs, and indeed EEs, in attaining desirable compliance levels. The AML/CFT regulation was inculcated in the financial sector reform which involved various global, continental and regional financial institutions.¹⁶ Most prominent of the institutions are the FATF, the International Monetary Fund (IMF) and the World Bank. The latter two are collectively known as the international financial institutions (IFIs). These institutions recognised the dire consequences that money laundering/terrorist financing (ML/TF) can have on the integrity of the international financial market and its likely contribution to financial crises.¹⁷ Hence, the institutional reactions were directed at setting, disseminating and continually assessing AML/CFT standards. The FATF, strengthened by the IFIs, was established to advance standards and ensure compliance with AML/CFT regulation. The standards set by the FATF impose restraints on the supervisory approach of regulatory bodies with the goal of determining how they regulate financial institutions (FIs).¹⁸

16 Kevin Davis, ‘Regulatory Reform Post the Global Financial Crisis: An Overview 2’ [2011] Report for Melbourne APEC Financial Centre, Australasian APEC Study. Centre at RMIT University <http://www.apec.org.au/docs/11_CON_GFC/Regulatory%20Reform%20Post%20GFC-%20Overview%20Paper.pdf8gt; accessed 10 July 2015.

17 FATF, ‘Global Money Laundering & Terrorist Financing Threat Assessment’ (FATF, July 2010), <https://www.imolin.org/pdf/imolin/Global_Threat_assessment.pdf8gt; accessed 20 July 2015.

18 Ibid.

However, an examination of the structure and processes involved in regulating and disseminating the AML/CFT standards has exposed the institutions to criticisms of legitimacy deficiency. This is particularly because ACs/EEs were sidelined from contributing to the standards which they are now subjected to. As can be imagined, these standards, mainly created by the Group of Seven (G7) countries are unreflective of the ACs/EEs’ peculiarities. This can further be illuminated by an inquiry into the behavioural impact of the FATF’s provisions and the significant relationship between international regulatory standards and state behaviour. To correct this perceived anomaly, the FATF introduced the risk-based approach (RBA) in 2012 to harness the peculiarities of individual countries and ease the assimilation of the AML/CFT standards.¹⁹ The effectiveness is, however, debatable.

19 FATF (n 2) recommendation 1.

Against this backdrop, central to this book is the argument that there is an unfavourable agency relationship between ACs/EEs and the international community. The IFIs/FATF, as collective principals, mandate compliance by ACs/EEs to the FATF’s standards and sanction non-compliance. This facilitates a situation where ACs/EEs face a heightened degree of exclusion from the global economy. The sanctions do not consider the unique challenges of these countries in meeting the demands of compliance with AML/CFT standards. This argument exposes a design flaw in AML/CFT standards and processes for benchmarking compliance, irrespective of the adoption of the RBA to compliance.²⁰ Hence, the current standards and processes have to be re-evaluated to adequately take account of the peculiarities of ACs/EEs²¹ with the aim of facilitating actual and proactive compliance.

20 Abdullahi Usman Bello and Jackie Harvey, ‘From a Risk-based Approach to an Uncertainty Based Approach...

Table of contents

• Cover
• Half-Title
• Series
• Title
• Copyright
• Contents
• Acknowledgement
• Abbreviations
• 1 Compliance with the Global Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) Regulation: Parameters and Paradoxes of Regulation in African Countries and Emerging Economies (AC/EEs)
• 2 The International Financial Sector Reform and International Legal Framework for Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) Regulation
• 3 Preconditions for Effective Regulations of Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) and Compliance Drivers in African Countries and Emerging Economies (AC/EEs)
• 4 The Agency Relationship between Collective Principals and Their Interaction with African Countries and Emerging Economies
• 5 Determinants of Africa’s Compliance Levels to the Global Anti-Money Laundering Regime
• 6 Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) Regime: Compliance within Emerging Economies (EE)
• 7 Legitimacy – A Means of Levelling the Playing Field?
• 8 Explanations and Conclusion
• Index