February 21, 2019

February 21, 2019

Subscribe to Latest Legal News and Analysis

February 20, 2019

Subscribe to Latest Legal News and Analysis

February 19, 2019

Subscribe to Latest Legal News and Analysis

FATF Evaluates the UK’s and Israel’s AML/CTF Programs and Welcomes Israel as its 38th Member

On December 7 and 10, 2018, the Financial Action Task Force (“FATF”) released two reports evaluating the United Kingdom’s (“UK”) and Israel’s anti-money laundering (“AML”) and counter-terror financing (“CTF”) programs and welcomed Israel as the 38th member of the task force. The FATF is an inter-governmental policymaking body dedicated to creating AML standards and promoting effective measures to combat money laundering (“ML”) and terrorist financing (“TF”). When releasing both reports, the FATF described the UK and Israel as key leaders and innovators in the fight against ML/TF and provided several recommendations on how both programs can be strengthened.

Because both reports total over 250 pages, this blog post focuses on only the key findings in each report.  The FATF Evaluation of the United Kingdom (the “UK Report”) concluded that, although the UK has effective and robust AML policies addressing both current and future threats, it needs to improve its AML oversight by increasing the resources dedicated to its financial intelligence unit. Meanwhile, the Joint FATF/MONEYVAL Evaluation of Israel (the “Israel Report”) praised the country’s effective use of financial intelligence but found that Israel needs to strengthen its preventative measures to address future ML/TF risks.

The UK Report

The UK Report documented the findings of the FATF’s on-site visit during March 2018. The report emphasized the fact that, due to the UK’s position as a major global financial center and the world’s largest center for cross-border banking, its top ML vulnerabilities include high-end ML, cash-based ML, and ML stemming from (1) fraud and tax crimes, (2) drug crimes, (3) human trafficking, and (4) organized crime, including transnationally.

As a whole, the report praised the UK’s AML/CTF regime and the “significant improvements” that the UK has made since its last FATF evaluation in 2007.   Notably, however, the FATF urged the UK to improve its AML/CTF oversight by increasing the resources available to its Financial Intelligence Unit (“UKFIU”).

In particular, the UK Report identified the following key successes:

  • The UK has developed a comprehensive understanding of its ML and TF risks, which is reflected in its national risk assessments published in 2015 and 2017. See here for the 2015 assessment and here for the 2017 assessment.

  • The UK’s public and private sectors effectively collaborate to prevent and combat emerging ML/TF threats. The report praised as “innovative” the UK’s Joint Money Laundering Intelligence Task Force, which facilitates information sharing across the public and private sectors to better identify and prioritize future threats.

  • Since prioritizing ML investigations in 2014, the UK has aggressively identified and prosecuted ML crimes. It annually conducts roughly 7,900 investigations, prosecutes 2,000 cases, and secures 1,400 convictions for ML crimes. These efforts have been aided by the UK’s use of new investigatory tools, such as unexplained wealth orders, which require individuals and entities to explain the origin of their assets.

  • Financial institutions and all designated non-financial businesses and professions (“DNFBPs”) are subject to comprehensive AML/CFT requirements, such as customer due diligence and the retention of beneficial ownership information.

  • The UK has taken significant steps to increase the overall effectiveness of its targeted financial sanctions regime, including through the creation of the Office of Financial Sanctions Implementation and the strengthening of penalties for violations.

Despite the UK’s program achievements, the FATF urged the UK to strengthen its AML/CTF program in important areas:

  • The FATF raised concerns with the UK’s policy decision to limit the role of the UKFIU in undertaking operational and strategic analysis, which has resulted in a shortage of human and IT resources. The FATF questioned (1) whether Suspicious Activity Report (“SAR”) data is being fully utilized by investigators; (2) the quality of financial intelligence; and (3) the UKFIU’s ability to share information with foreign financial intelligence units.

  • The UK’s program supervises over 19,600 entities and should consider how to guarantee adequate supervision across risk categories. The FATF warned that a large number of these regulated entities engage in high- and medium-risk activities but are not subject to regular, cyclical supervision. Moreover, it cautioned that DNFBP supervisors, in particular, lack a comprehensive understanding of ML/TF risks.

The Israel Report

Similar to the UK Report, the Israel Report analyzed the findings of the FATF’s on-site visit during March 2018. The report identified Israel’s top ML risks as relating to fraud, tax offenses, and organized crime. The FATF explained that, due to Israel’s geographic location, it also faces significant TF threats from its surrounding neighbors.

In granting Israel membership to the organization, the FATF concluded that Israel has “demonstrated a commitment to protect the integrity of the financial system” and developed a robust AML/CTF program that “is achieving good results in identifying and responding to the risks the country is facing.” In contrast to the UK Report, the Israel Report specifically praised Israel’s effective use of financial intelligence. However, the FATF also underscored Israel’s need to understand future ML/TF risks and to implement preventative, risk-based measures to address them now.

Specifically, the Israel Report identified the following program achievements:

  • Israel has demonstrated a “highly effective use” of financial intelligence and created a database comprised of comprehensive financial intelligence that ML/TF authorities regularly and effectively access. The FATF credits this use with Israel’s widespread success in ML/TF investigations and prosecutions. The report noted that from 2014 to 2017, Israel averaged a total of 415 ML investigations, 50 ML prosecutions, 34 ML convictions, and 24.6 million Euro in confiscations each year.

  • Israel effectively coordinates its ML/TF priorities across national agencies, including the Israel Money Laundering and Terror Financing Prohibition Authority, Shin-Bet, the Israel National Police, the Israel Tax Authority, and the Israel Companies Authority. In addition, the FATF specifically praised Israel’s Executive Steering Committee, which functions as the national authority on AML strategy, policy development, and coordination.

  • Israel has implemented robust prohibitions with regard to activities related to Iran – and, more recently, North Korea – that financial institutions understand.

  • With the exception of the money service businesses sector, Israel’s financial regulators have a strong understanding of ML/TF risks facing the financial sectors they supervise.

Notably, the FATF also urged Israel to make key improvements to its AML/CFT program:

  • Although Israel has a robust understanding of its current ML/TF risks, regulators lack a sufficient understanding of potential ML/TF risks that their supervised entities may face in the future – and in contrast to the UK’s program. In addition, the FATF urged Israel to implement a risk-based approach to supervising all regulated entities across risk categories.

  • Israel occasionally struggles to provide timely ML/TF information and assistance to other nations upon request.

  • Israel lacks comprehensive and coordinated oversight of non-profit organizations. However, the FATF noted that Israel has created a registration and supervision framework covering those organizations most at risk of TF abuse.

Copyright © by Ballard Spahr LLP

TRENDING LEGAL ANALYSIS


About this Author

Mary Treanor Lawyer Ballard Spahr
Associate

Mary Treanor focuses her practice on representing energy and commodity companies, financial institutions and trade associations in a variety of regulatory, compliance, litigation, and transactional matters. Her work includes representing clients in enforcement matters before the Commodity Futures Trading Commission, Federal Energy Regulatory Commission and Chicago Mercantile Exchange, as well as advising on regulatory matters and assisting with transactions.

202 862 2392