Why is Customer Due Diligence necessary?

Many of the methods applied by criminals to launder money or finance terrorism involve the use of the financial system to transfer funds. Financial institutions, in particular banks, are most vulnerable to abuse for that purpose. In order to protect themselves, it is essential that financial institutions have adequate control and procedures in place that enable them to know the person with whom they are dealing. Adequate due diligence on new and existing customers is a key part of these controls.

The application of strict Customer Due Diligence (CDD) by financial institutions and a high degree of transparency is crucial to fight money laundering and the financing of terrorism effectively. CDD must be applied upon establishment of a business relationship or in preparation of a specific cash transactions in excess of a certain amount. CDD must also be applied whenever financial institutions suspect money laundering or terrorist financing activities.

The basic steps of CDD measures are the appropriate identification of a customer and/or beneficial owner, the verification of the identity of the customer or beneficial owner, as well as the collection of information on the customer's purpose and nature of the business relationship.

International Standards on CDD have been set by both the Basel Committee on Banking Supervision(Basel Committee) and the Financial Action Task Force (FATF).

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What are Typologies?

In the AML/CFT context, the term “typologies” refers to the various techniques used to launder money or finance terrorism. Criminals are very creative in developing methods to launder money and finance terrorism. Money laundering and terrorism financing typologies in any given location are heavily influenced by the economy, financial markets, and anti-money laundering/counter financing of terrorism regimes. Consequently, methods vary from place to place and over time.




Those involved in the fight against money laundering or the financing of terrorism rely on the most current information on typologies. FATF members provide one another and the Financial Action Task Force (FATF) Secretariat annually with observations based on recent cases or studies of particular subject areas. FATF collects this information and attempts to describe the trends in order to be in a position to adapt recommendations to specifically address money laundering and terrorist financing risks. FATF also informs the public at large by publishing annual typology reports on its webpage.

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How are Efforts to Combat Money Laundering and Financing of Terrorism linked?

Money laundering is the process of concealing the illicit origin of proceeds of crimes. Terrorist financing is the collection or the provision of funds for terrorist purposes. In the case of money laundering, the funds are always of illicit origin, whereas in the case of terrorist financing, funds can stem from both legal and illicit sources. The primary goal of individuals or entities involved in the financing of terrorism is therefore not necessarily to conceal the sources of the money but to conceal both the funding activity and the nature of the funded activity.

Similar methods are used for both money laundering and the financing of terrorism. In both cases, the actor makes an illegitimate use of the financial sector. The techniques used to launder money and to finance terrorist activities/terrorism are very similar and in many instances identical. An effective anti-money laundering/counter financing of terrorism framework must therefore address both risk issues: it must prevent, detect and punish illegal funds entering the financial system and the funding of terrorist individuals, organizations and/or activities. Also, AML and CFT strategies converge; they aim at attacking the criminal or terrorist organization through its financial activities, and use the financial trail to identify the various components of the criminal or terrorist network. This implies to put in place mechanisms to read all financial transactions, and to detect suspicious financial transfers.

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What is Financing of Terrorism?

Terrorist financing involves the solicitation, collection or provision of funds with the intention that they may be used to support terrorist acts or organizations. Funds may stem from both legal and illicit sources. More precisely, according to the International Convention for the Suppression of the Financing of Terrorism, a person commits the crime of financing of terrorism "if that person by any means, directly or indirectly, unlawfully and willfully, provides or collects funds with the intention that they should be used or in the knowledge that they are to be used, in full or in part, in order to carry out" an offense within the scope of the Convention.

The primary goal of individuals or entities involved in the financing of terrorism is therefore not necessarily to conceal the sources of the money but to conceal both the financing and the nature of the financed activity.

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What is Money Laundering?

Criminal activities, such as drug trafficking, smuggling, human trafficking, corruption and others, tend to generate large amounts of profits for the individuals or groups carrying out the criminal act. However, by using funds from such illicit sources, criminals risk drawing the authorities' attention to the underlying criminal activity and exposing themselves to criminal prosecution. In order to benefit freely from the proceeds of their crime, they must therefore conceal the illicit origin of these funds.

 

Briefly described, "money laundering" is the process by which proceeds from a criminal activity are disguised to conceal their illicit origin. More precisely, according to the Vienna Convention and the Palermo Convention provisions on money laundering, it may encompass three distinct, alternative actus reas: (i) the conversion or transfer, knowing that such property is the proceeds of crime (ii) the concealment or disguise of the true nature, source, location, disposition, movement or ownership of or rights with respect to property, knowing that such property is the proceeds of crime; and (iii) the acquisition, posession or use of property, knowing, at the time of the receipt, that such property is the proceeds of crime.

 

The international standard for the fight against money laundering and the financing of terrorism has been established by the Financial Action Task Force (FATF), which is a 33-member organization with primary responsibility for developing a world-wide standard for anti-money laundering and combating the financing of terrorism. The FATF was established by the G-7 Summit in Paris in 1989 and works in close cooperation with other key international organizations, including the IMF, the World Bank, the United Nations, and Can money laundering be quantified?

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The Fund's involvement in Anti-money laundering/ combating the financing of terrorism

The international community has made the fight against money laundering and the financing of terrorism a priority. Among the goals of this effort are: protecting the integrity and stability of the international financial system, cutting off the resources available to terrorists, and making it more difficult for those engaged in crime to profit from their criminal activities. The IMF's unique blend of universal membership, surveillance functions, and financial sector expertise make it an integral and essential component of international efforts to combat money-laundering and the financing of terrorism.

 

In 2000, the Fund responded to calls from the international community to expand its work in the area of anti-money laundering (AML) in general and concerning the abuse of Offshore Financial Centers (OFC) in particular by initiating an OFC assessment program and exploring how it could incorporate AML work into its activities, especially Article IV surveillance and the newly-established Financial Sector Assessment Program (FSAP).1 Work on developing an AML Report on Standards and Codes (ROSC) module was ongoing when the tragic events of September 11, 2001 intensified the efforts and broadened their scope to include combating the financing of terrorism (CFT). Within about a year, the Fund was already actively at work assessing member countries compliance with the international standard developed (and subsequently fundamentally revised) by the Financial Action Task Force (FATF), as well as providing technical assistance on how to improve AML/CFT regimes. This preliminary experience was favorably evaluated by the Board, which in March, 2004, decided to incorporate AML/CFT assessments and AML/CFT technical assistance into the Fund's regular work and continue to make AML/CFT assessments a mandatory ROSC in every FSAP and OFC assessment.

The IMF is especially concerned about the possible consequences of money laundering and the financing of terrorism on its members' economies. These include risks to the soundness and stability of financial institutions and financial systems, increased volatility of international capital flows, and a dampening effect on foreign direct investment. The problem is global; money launderers and terrorist financiers exploit loopholes and differences among national AML/CFT systems and move their funds to or through jurisdictions with weak or ineffective legal and institutional frameworks.

The IMF is contributing to the international fight against money laundering and the financing of terrorism in several important ways, consistent with its core areas of competence. As a collaborative institution with near universal membership, the IMF is a natural forum for sharing information, developing common approaches to issues, and promoting desirable policies and standards -- all of which are critical in the fight against money laundering and the financing of terrorism. In addition, the IMF's broad experience in conducting financial sector assessments, providing technical assistance (TA) in the financial and nonfinancial sectors, and exercising surveillance over members economic systems is particularly helpful in evaluating country compliance with the international AML/CFT standards and in developing and implementing programs to assist member countries in addressing identified shortcomings.

Currently, the three main areas of IMF work in connection with AML/CFT are:

Assessments: Each evaluation of financial sector strengths and weaknesses conducted under the Financial Sector Assessment Program (FSAP) and the Offshore Financial Centers Program must include an assessment of the jurisdiction's AML/CFT regime. Such assessments measure compliance with the FATF 40+9 Recommendations according to an agreed Methodology for Assessing Compliance with the FATF 40+9 Recommendations also used by the Financial Action Task Force (FATF), the FATF-style regional bodies (FSRBs), and the World Bank in conducting their assessments;

 

Technical Assistance: Along with the World Bank, the IMF provides substantial technical assistance to member countries on strengthening their legal, regulatory, institutional and financial supervisory frameworks for AML/CFT; and

 

Policy Development: IMF and World Bank staff have been active in researching and analyzing international practices in implementing AML/CFT regimes as a basis for providing policy advice and technical assistance.

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