Understanding Global Best Practices for Risk Assessments and Response to Money Laundering and Terrorism Financing Risks Panel Discussion

Purpose of AML/CFT Polices A blue print for the institution and agency’s AML/CFT efforts to improve overall AML/CFT system Direct and guide implementation of national AML/CFT efforts

Purpose of AML/CFT Polices Successful implementation of policies will bring about: greater transparency, increase revenue, create stability in the financial sector, reduce and control of financial crimes Improved compliance and a more effective AML/CFT regime

Principles for Formulation of AML/CFT Policies Reflect and implement National AML/CFT strategy Findings Pakistan’s NRA Findings of MER and FATF Consistent with legal, institutional and political environment,

How to work together effectively

FATF – Global Standard Setter for AML/CFT Presently 35 members and two regional organizations. FATF Member countries' are mostly G8 and G20 countries'; Objectives are “to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system”; Other participants are FSRBs and a number of observer organizations, including the IMF, WB, United Nations; FATF relies on a strong global network of Eight FSRBs (APG for Pakistan) essential role in promoting effective implementation of the FATF Recommendations by their membership and in providing expertise and input in FATF policy-making; Over 180 jurisdictions have committed to the FATF Recommendations through the global network of FSRBs and FATF memberships.

Why have the FATF Standards Reducing [serious] [profit motivated] crime and terrorism by: Detecting criminal activity in the financial sector (F/S) related to Money Laundering (ML) or Financing of Terrorism (FT); Investigating and prosecuting & effectively ML and FT; Depriving criminals of Proceeds of Crime (POC) and resources for ML or terrorist funding for terrorism. Thus protecting society! Preventing use by criminals of: Financial Institutions & the [international] F/S; DNFBPs, NPOs and Legal persons and arrangements; Other [international] markets and commerce. Thus contributing to integrity and soundness of the financial system!

Why have the FATF Standards Pursuing criminals for POC and FT offences internationally and domestically Harmonizing regulatory and law enforcement approaches for ML and FT Facilitating international and domestic criminal investigations Prevent and successfully prosecute ML and FT crimes domestically & internationally!

Anti-Money Laundering and Combating the Financing (AML/CFT) Standards R1- Assessing Risks and Applying a Risk Based Approach R3 -Criminalization of ML, R4- Provisional Measures and Confiscation R5 - Criminalization of FT Freezing of Terrorist Assets and Financing of Proliferation R6- Freezing of terrorist assets R7- Proliferation Financing R8- NPOs Preventive Measures (1) R10 - Customer Due Diligence R11- Record Keeping Preventative Measures (2) R12-PEPS R13-Correspondent Banking R14- Money or Value Transfer Systems R15-New Technologies, R16- Wire Transfers Preventative Measures (3) R17-Reliance on 3rd parties R18 -Internal Control and Foreign branches and Subsidiaries Preventative Measures (4) R20- Reporting of Suspicious Transactions R21 -Tipping Off, confidentiality Regulation and Supervision R26 -Regulation and Supervision of financial institutions R27- Powers of supervisors Transparency and Beneficial Ownership R24-Legal Persons-Transparency and Beneficial Owners R25- Legal Arrangements- Transparency and Beneficial Owners Powers and Responsibilities of Competent Authorities – FIU and Law Enforcement R29 – FIUs R30 and 31 – Responsibilities and Powers of law enforcement and investigative authorities R32- Cash Couriers Designated non-financial businesses and professions R22- DNFBPs: Customer Due Diligence R23-DNFBPs: Other measures R28- Supervision of DNFBPs Other Institutional Measures - General Requirements R2 -National Cooperation and Co-ordination R33- Statistics R34- Guidance and Feedback R35- Sanctions International Cooperation R36-International Instruments R37-Mutual Legal Assistance R38-MLA- freezing and confiscation R39- Extradition R40-Other forms of cooperation The new 40 Recommendations (adopted in 2012) In yellow are the sections titles as to how the 40 Recommendations are divided The highlighted Recommendations are those we will cover during this session

The AML/CFT Framework FATF Recommendation 1 The Risk- Based Approach – AML/CFT Considerations

Definition of risk “The [negative] effect of the uncertainty related to understanding or knowledge of, [adverse] ML/FT events, their consequence, or likelihood on the objectives of the governments” Assert that ML/FT events are all adverse and have negative effects

The Strategic Overview of the Risk Based Approach Principle ML/TF risks effectively mitigated Developing strategies, systems and tools and employing resources in a manner consistent with assessed risk Assessing and Understanding Risk

Goals Risk Evaluations The goals of the Risk Assessment for ML/FT are to help Governments and financial institutions: Assess the FT/ML risks it faces Evaluate the effectiveness of its risk mitigation strategies for AML/CFT Prioritize its risk mitigation activities and to design appropriate and proportionate policy responses to AML/CFT Make and justify decisions about limiting AML/CFT coverage for low risk sectors and products Improve its CFT regimes (AML) **** The FATF Standards provide flexibility on how countries assess their TF/ML risks.

Measuring risk Threat, Vulnerability, Consequence Threat: Analyze the likelihood that ML/FT will be attempted Vulnerability: Analyze the likelihood that, if attempted, it will be successful Consequence: Analyze the likely impact that successful ML/FT will have on objectives. Example: Street dealer buys a beer: Threat, vulnerability – so high as to make likelihood a certainty. Consequence so low as to make the risk negligible.

TF Threat , Consequences and Risk Considerations TF Threat - Funds raised or assets accumulated by a group or a person to be used for terrorist purposes – could be legitimate or illegitimate source of funds; TF/ML Vulnerability - are their measures in place to effectively detect and prevent FT, laws, trained investigators, informed financial sector professionals or are their financial products or existence of sectors that could facilitate ML/FT – factors such as cash based economy, hawala’s etc. TF/ML context, Consequence - immediate, short and long term impact of FT Likelihood, in the TF context, is the probability of a TF risk materialising – what role do we play to prevent this from occuring Presentation Title

TF/ML Vulnerabilities Considerations (examples) Areas of potential vulnerability (depending on the country’s threat profile); Vulnerabilities in particular financial/non-financial products and services (sectoral analysis) Weaknesses in the AML/CFT regime (e.g. capacity of authorities to identify and prevent ML/TF) Potential misuse of sectors not subject to regulation Presentation Title

Other Considerations for ML/TF Threats Country is a regional or international financial center Country borders a conflict zone Country has a large informal sector/cash based economy Country has local population which may be sympathetic to domestic or international terrorist groups Presentation Title

How Risk’s and the IOs fit together? Supervision (IO3) Risk and Coordination (IO1) Preventive Measures (IO4) Beneficial Ownership (IO5) Suspicious Transaction Reports TF Financial Sanctions (IO10) FIU Analysis (IO6) International Cooperation (IO2) Investigation and Prosecution (IO7) Terrorist Financing (IO9) This slide is just an illustration of how the effectiveness framework fits together, and how the Outcomes affect each other. One of the difficulties of developing an outcomes-based framework for assessing effectiveness is that the outcomes are not completely independent of each other. This slide shows how they are interrelated - and hence the directions in which a problem in one area might affect another. The boxes on the right are the terrorist financing outcomes including TF targeting financial sanctions. The point to note is that they are heavily dependent on some of the Immediate Outcomes in the centre. Finally, you’ll see that proliferation financing is on its own, outside the “risk and coordination” box, and not connected to anything else. This is because of the FATF’s limited mandate with respect to the financing of proliferation, which only includes Recommendation 7, parts of Recommendation 2, and the aspects of effectiveness associated with them. Confiscation (IO8) How Risk’s and the IOs fit together? Financing of Proliferation (IO11)

It is all about Effectiveness “Very pretty, Colonel, very pretty. But can they fight?”

Meaning of “successful” ML/FT If attempted, it will be undetected (either by financial sectors and reporting entities, the authorities, or both), or If detected, it will not be investigated, or If investigated, it will not be prosecuted, or If prosecuted, it will not lead to a conviction, or If convicted, the perpetrator will go unpunished. With the overall outcome that the ML/TF will be able to be used freely by terrorist or organize crime And if punished, the punishment will not be dissuasive.

Panel Questions Good governance is essential in providing a platform for country level development and for improving the potential delivery of services across the broad population base of a country. What role does AML/CFT play in the governance of a country? – Dr Ishrat Hussain Does the adoption of a risk-based approach improve the prospects for financial inclusion, i.e. which will can in turn improve the outlook for economic development as well as increase the size of the formal financial sector that is subject AML/CFT measures? – Dr Shamshad Akhtar It is essential that risks are properly defined and that they are understood in context, specifically in respect of ML, TF and compliance risks? Have these separate risks been adequately defined and addressed? Are there any development opportunities in this regard? – Dr. Waqar Masood Khan

Panel Questions Country and institutional level risk-based approaches are maturing in most jurisdictions. What are your thought on how the risk-based approaches will develop going forward? – ALL There is a developing understanding that an AML/CFT risk-based approach means that a “zero tolerance” approach is not practical? What are your thoughts on the level of ML/TF risk that is acceptable for institutions? – All It has often been said that “if you can’t measure it, you can’t manage it”. Is there adequate data, information or objective measures available to understand ML/TF risks going forward (i.e. to achieve desired AML/CFT outcomes)? – All What does good look like in respect of ML/TF risk assessment and proportionate responses thereto? – All An AML/CFT risk-based approach means that resources at country and institution levels should be focussed on the higher ML/TF risks. Has there been an adequate de-emphasis of lower risks and sufficient resources re-assigned to higher risks? – All Presentation Title

Thank you !