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Money laundering and terrorist financing activities were problems well before 2001, but 9/11 gave a boost to more robust regimes for anti-money laundering (AML) and combating the financing of terrorism (CFT). The center of these efforts is the multilateral Financial Action Task Force (FATF), a multilateral body that develops and promotes AML/CFT norms; these are embodied in the so-called Forty Recommendations on AML and Nine Special Recommendations on Terrorist Financing. Through periodic peer-review, the FATF reviews member compliance and suggests areas for improvement as necessary.
The FATF currently has 36 members, including six Asian ones: Japan, Hong Kong, Singapore, China, India and Korea. A number of other Asian economies with an offshore banking presence were monitored in the first half of the 2000s by the FATF’s Non-Cooperative Countries and Territories (NCCT) Initiative (for more on the initiative, see here); these reviews included Indonesia, the Marshall Islands, Nauru, Niue, Pulau, Philippines, Russia, Samoa, and Vanuatu. Periodically, the FATF also identifies jurisdictions that have “substantial deficiencies” in addressing these issues and warrant “countermeasures.” We reported recently on the fact that the DPRK and Iran were identified as meeting this threshold.
But the risks in the region are by no means limited to what countries like North Korea do through their banking systems. The stringency of AML/CFT supervisory frameworks is of obvious significance with respect to what North Korea can get away with elsewhere.
The San Francisco Fed has produced a useful overview of progress on AML/CFT in Asia in the November issue of its Asia Focus. The news is decidedly mixed. The FATF peer review process has generated a rating scheme: six “core” and ten “key” recommendations from the FATF 40+9 list are rated on a four point scale: compliant (C), largely compliant (LC), partially compliant (PC), and non-compliant (NC). Asia Focus reports these compliance scores for a group of 11 Asian jurisdictions: China, Hong Kong, India, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Taiwan, Thailand and Vietnam.
Not surprisingly, Singapore performs best with only 13% of core and key recommendations rated partially or non-compliant. However, in Vietnam 94% were rated as partially or non-compliant. In addition, Thailand, the Philippines and Indonesia all had 75% or more of core and key recommendations rated PC or NC. As a result, all four of these ASEAN countries are listed on FATF’s watchlist of high-risk jurisdictions.
What are Asian governments not doing? For five of the sixteen core and key recommendations on money laundering, over two-thirds of the major Asian economies reviewed were rated PC or NC. Unfortunately, the list includes some basics:
- Failure to criminalize all forms of money-laundering, including participation in an organized criminal group and racketeering; terrorism; human trafficking; corruption and bribery; smuggling; and insider trading and market manipulation.
- Failure to maintain strong customer due diligence and record keeping standards;
- Inadequate monitoring of unusual and suspicious transactions.
- Weak licensing procedures and supervision of financial institutions and businesses providing money transfer services.
- Failure to comply with the newer CFT provisions of the Special Recommendations.
Cutting across these particular statutory weaknesses, the report finds serious lack of attention to enforcement. Put differently, compliance scores based on statute may not say much about what countries are actually doing--or not doing; China is a natural concern in this regard but it is by no means alone. The problems posed by Iran and North Korea do not just reside with them, but in the porousness of enablers who permit the circumvention of sanctions and of money laundering and terrorist financing as well.
