Ethics and governance in the European Financial centers

This is the first article of a series about the deficiencies of the Risk-based approach.

The FATF last year published a Guidance on the Risk-Based Approach to combating money laundering and terrorist financing in close consultation with representatives of the international banking and securities sectors. The Guidance supports the development of a common understanding of what the risk-based approach involves, outlines the high-level principles involved in applying the risk-based approach, and indicates good public and private sector practice in the design and implementation of an effective risk-based approach.


I will start with country risk as, in my opinion, jurisdictions are the risk of risks.

As the FATF observed "there is no universally agreed definition by either competent authorities or financial institutions that prescribes whether a particular country or geographic area (including the country within which the financial institution operates) represents a higher risk. Country risk, in conjunction with other risk factors, provides useful information as to potential money laundering and terrorist financing risks. Factors that may result in a determination that a country poses a higher risk include:
• Countries subject to sanctions, embargoes or similar measures issued by, for example, the United Nations (“UN”). In addition, in some circumstances, countries subject to sanctions or measures similar to those issued by bodies such as the UN, but which may not be universally recognized, may be given credence by a financial institution because of the standing of the issuer and the nature of the measures.
• Countries identified by credible sources as lacking appropriate AML/CFT laws, regulations and other measures.
• Countries identified by credible sources as providing funding or support for terrorist
activities that have designated terrorist organisations operating within them.
• Countries identified by credible sources as having significant levels of corruption, or other criminal activity.

(…)

In determining the levels of risks associated with particular country or cross border activity financial institutions and governments may draw on a range of publicly available information sources, these may include reports that detail observance of international standards and codes, specific risk ratings associated with illicit activity, corruption surveys and levels of international cooperation.

As the FATF stated in a previous report "The effective implementation of international AML/CFT standards requires not just appropriate legislative, regulatory and organisational structures but a robust system of governance to ensure the integrity of the systems in place. Corruption poses an important threat to good governance and is therefore a major threat to the effective implementation of AML/CFT regimes. The link between AML/CFT and corruption is twofold. Firstly, the proceeds of corruption, which may be considerable, are susceptible to being laundered. Secondly, corruption, and poor governance arising from corrupt institutions (such as the judiciary, the police, or regulatory authorities) and/or individuals, can substantially blunt the effectiveness of an AML/CFT system. While some consideration has already been given to the link between AML/CFT and corruption, there is a critical need to (i) develop a greater understanding of how corruption damages the effectiveness of AML/CFT systems, and (ii) develop appropriate strategies to deal with the issue." (Paragraphs 32 and 33 of the FATF Annual Report 2005-2006).



When reading this, can the FATF condone reports from the GRECO and the OECD (Working group on Bribery)?
Definitely not.
Non compliance to GRECO and OECD (Working group on Bribery) Recs should even be a reason for the FATF to consider a country as non-cooperative to be coherent.

Richard Murphy quoted Jack Blum, a US attorney who has specialised in tackling offshore abuse for many years. He can fairly claim to have done more to expose BCCI than anyone else.

Jack Blum testified before the Senate Finance Committee investigation and analysed the problem with the BVI :

The tax avoiders and tax cheats see national borders as their friends and freely use secrecy jurisdictions and jurisdictions with lax trust, corporation and insurance laws to create structures that hide money from tax collectors and law enforcement.

Some jurisdictions have developed specialities in providing these products. The British Virgin Islands, for example, is the place to go for quick, cheap, anonymous incorporation. It has more than 500,000 shell companies. It has also developed a new trust “product” that allows a “trust” to be the owner of a corporation without the trustee having any knowledge about the operation of the corporation. Under U.S. law this is not a “trust.”

It is important to understand that the structures are mere pieces of paper with no commercial reality. They are backed by formalities that allow them to pass paper checklists in other jurisdictions including the United States. For example, the island of Nevis, part of the Federation of St. Kitts and Nevis, is home to tens of thousands of corporations, all of which have boards of directors. When banks and brokerage firms ask about the control of the corporation for AML purposes, the person opening the account furnishes the passport photos of the nominee shareholders, officers and directors. The same twenty people are the nominees for thousands of corporations. They have no knowledge of, or fiduciary responsibility for the corporation’s business. If the nominee directors and officers were water-boarded they could not tell you what the corporation was doing or who owned it. They do not participate in “corporate” decisions and keep no records relating to corporate activities. They do not even know where the records are.

BVI is not the only jurisdiction which has legalized “sham” trusts. Other jurisdictions have passed trust laws that leave the trustee with little or no responsibility

The Irish Times reported that a lease between the partners in a development and another company established by them to avoid paying VAT was invalid, because of the absence of prior written consent of the mortgagee. In addition, the lease and leaseback had no commercial reality and constituted an abusive practice under EU law, rendering invalid the VAT classification on the transaction.

Read JUDGMENT