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.

As the FATF states on its website, "the OECD is giving priority to combating economic crimes such as corruption and tax fraud. Its Principles of Corporate Governance and its work on beneficial ownership is of direct relevance to the FATF".

The OECD last year published a Glossary of International Standards for Criminalisation of Corruption where it is stated that "For the bribery offences, the briber must offer, promise or give the bribe with the intention that the bribed official act or refrain from acting in the exercise of his/her functions or duties, etc. For trading in influence, the briber must intend that the recipient of the bribe influence the decision-making by an official. However, this does not mean that the intended result must have in fact occurred. The bribery offences require proof that the briber intended to influence the actions of the bribed official; they do not require proof that the official did, in fact, alter his/her conduct. (…) Proving the requisite intention is not always an easy task since direct evidence (e.g. a confession) is often unavailable. Indeed, bribery and trading in influence offences can be difficult to detect and prove due to their covert nature, and because both parties to the transaction do not want the offence exposed. Therefore, the offender’s mental state may have to be inferred from objective factual circumstances. (…) It is vital that the rules of evidence in criminal procedural codes permit this form of proof."

To implement what the OECD states the OECD explains that “Ethics is everybody’s responsibility, including that of an assertive media, which through its probing reporting helps citizens to act as watchdog over the actions of public officials” (Measures for promoting integrity and preventing corruption 13 octobre 2004,). In other words, the OECD, encourage the citizens and/or the justice to report as watchdog what the OECD calls the “objective factual circumstances” that can be determined by asking three series of questions on the giver’s interest to act, the relevance of the grant for the recipient and the communication on the grant should it take place.

The giver’s interest to act

Two dimensions must me assessed: the functioning of the jurisdiction where the giver located is located and his/her/its relationship with the recipient

A couple of questions relating to the jurisdiction should be asked :
- Is there a TI (Transparency International) chapter?
- Is the jurisdiction well ranked in its area in TI Barometer?
- Are Recs to fight corruption (GRECO, OECD Working group on bribery) implemented?
- Does the liability of legal person exist in the penal law?
- Is the press actually acting as a watchdog?

These questions are not exhaustives. The answer « no » to one or several question(s) should incitate the recipient to refuse the grant as it would be clues of “objective factual circumstances” as the OECD said.

Another critical question should be asked : does the giver expect or may the giver expect something from the recipient because of his/her/its role (a report, an assessment, a decision...) The answer « yes » should incitate the recipient to refuse the grant as it would be a clue of “objective factual circumstances” as the OECD said.

The relevance of the grant for the recipient

To assess, the relevance of the grant for the recipient, two dimensions should be taken into account: the risk for the recipient’s independance and the status of grants in the recipient’s funding.

To assess the risk for the recipient’s independance, three questions from Transparency International (6th TI principle) should be asked:
- May the funding compromise the recipient' ability to address issues freely?
- May the funding compromise the recipient' ability to address issues thoroughly?
- May the funding compromise the recipient' ability to address issues objectively?
- May the giver remind later the recipient of the grant to negociate a favor?
The answer « yes » to one or several question(s) should incitate the recipient to refuse the grant as it would be clues of “objective factual circumstances” as the OECD said.

Another critical question should be asked to verify if such grants are part of the recipient’s funding? The answer « no » should incitate the recipient to refuse the grant as it would be a clue of “objective factual circumstances”, as the OECD said.

Additional question for a retoactive analysis if the grant took place

Is the grant communicated by both parties, the giver and the recipient?

The answer « no » would build the “objective factual circumstances”, as the OECD said.


This pragmatic framework to assess “objective factual circumstances” as recommended by the OECD and the FATF that implement the Principles of good governance as stated by the OECD, allows identifying situations where the giver is de facto a briber, which must be reported as recommended by the OECD and the FATF that implement the Principles of good governance as stated by the FATF.

Kevin McCoy, from USA TODAY reported that Senate Finance Committee leaders announced plans for new laws against offshore tax evasion Thursday after a new federal report found American ties to thousands of firms registered in the Cayman Islands.

Several senators criticized the Internal Revenue Service for not taking a tougher approach against offshore havens.

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