Executive Summary
This background paper highlights the relevance of AML/CFT and broader financial integrity issues in the context of other Fund policies. It discusses the nexus between AML/CFT and a range of Fund policies, including the Framework for Enhanced Engagement on Governance (2018, and 2023 review), the Board Paper on Recent Trends in Correspondent Banking Relationships (2017), the Fund Policy Paper on Elements of Effective Policies for Crypto Assets (2023), the Review of the Role of Trade in the Work of the Fund (2023), the Strategy for Fragile and Conflict-Affected States (2023), the Board Paper on Small States’ Resilience to Natural Disasters and Climate Change (2016), the Review of the Institutional View on the Liberalization and Management of Capital Flows (2022), the Strategy to Help Members Address Climate Change Related Policy Challenges, Modes and Delivery and Budget Implications (2021), the Central Bank Transparency Code (2021), and the Review of Flexible Credit Line, Short-Term Liquidity Line, Precautionary Liquidity Line (2023).
A. Background
1 1. AML/CFT issues are integrated in a range of Fund policies. Financial integrity issues are highly relevant to the broader policy agenda of the Fund: For instance, AML/CFT tools are vital in anti-corruption efforts, appropriate AML/CFT measures are necessary to mitigate ML/TF risks associated with VAs and other forms of digital money, and financial integrity safeguards are key to climate change policies and programs (for instance, to prevent the misuse of carbon emission credit exchanges to defraud taxpayers and limiting the laundering of proceeds of environmental crimes). Further, TF concerns could be acute for FCS, and assessing and mitigating TF risks is a key element in country engagement with FCS members in the Fund’s FCS strategy. Accordingly, AML/CFT and broader financial integrity issues have been integrated in a range of Fund policy papers where these considerations are relevant. The relevant workstreams under the AML/CFT strategy are constantly aligned with the Fund’s relevant policies on surveillance, lending, and CD (e.g., the Comprehensive Surveillance Review, Review of Program Design and Conditionality, and the CD strategy).
B. Framework for Enhanced Engagement on Governance
2. Some AML/CFT tools are of high relevance for the governance policy. AML/CFT is one of the six state functions under the governance framework, with a focus on the use of four specific AML measures (out of the 40 Recommendations) that are also useful to tackle proceeds of corruption at the domestic level. 2 These specific measures relate to preventive measures, enforcement against ML and international cooperation and asset recovery requirements. The 2023 Review of the Implementation of the 2018 Governance Policy covered staff’s engagement on AML/CFT issues as one of the six state functions, noting that staff identified vulnerabilities stemming from weak AML/CFT frameworks in 25–35 percent of the membership since the 2018 Framework was put in place. Discussions on AML to tackle domestic proceeds of corruption have been included in surveillance, lending, governance diagnostics, and CD. In a notable example of the use of AML/CFT tools to tackle corruption, commitments on beneficial ownership transparency were included in COVID-19 related emergency financing to improve transparency and accountability in public procurement (Box III.1).
1 Prepared by Arz Murr, Jonathan Pampolina, Francisca Fernando, Ke Chen, Santiago Texidor Mora, Mohammed Janahi, André Kahn, and Indulekha Thomas (all LEG).
3. Another element is the voluntary assessment of transnational aspects of corruption with a focus on “facilitation” through the assessment of the effectiveness of the AML framework in combatting the foreign proceeds of corruption in the members’ economies. Such coverage in surveillance is assessed on a voluntary basis under the transnational aspects of corruption, and covers elements of the AML/CFT standards, such as preventive measures (e.g., foreign politically exposed persons), enforcement against ML generated by foreign proceeds of corruption, and international cooperation and asset recovery requirements, that are equally beneficial in the fight against ML and corruption (and its proceeds). The 2023 Review of the governance policy also assessed the voluntary coverage of transnational corruption in Fund surveillance, noting that the voluntary coverage since 2018 has identified the need to strengthen the frameworks related to identification of cross-border risks, transparency of beneficial ownership information, and preventive measures as well as asset recovery efforts.
4. Corruption and governance vulnerabilities could also undermine the effectiveness of the AML/CFT framework, and staff will continue looking at those structural aspects. Governance vulnerabilities and the severity of corruption affect the effectiveness and outcomes of AML/CFT systems. For instance, AML/CFT frameworks are weakened if the governance of the AML/CFT supervisors or financial intelligence units (FIUs) is undermined, or if judiciary or law enforcement agencies are corrupt. Staff will continue deepening the assessment of those structural issues under various workstreams and provide relevant policy advice and recommendations, as appropriate.
2 The six state functions are (i) fiscal governance; (ii) financial sector oversight; (iii) central bank governance and operations; (iv) market regulation; (v) rule of law; and (vi) AML/CFT.
Box III.1. Entity Transparency and COVID-19-Related Procurement
The global pandemic gave rise to significant issues of transparency of emergency procurement. Country authorities needed to act rapidly in procuring necessary equipment and medicines as part of their pandemic responses. Lockdowns and travel restrictions exacerbated global supply chains, which further added pressures to act fast in the context of emergency-related procurement. Funds dedicated to the pandemic response needed to be fully maximized and devoted to their intended purposes. Misuse of these funds would have weakened the effectiveness of the COVID-19 response, hampered post-pandemic economic recovery, and disproportionally impacted vulnerable sectors and people.
Leveraging existing AML/CFT and governance tools (i.e., beneficial ownership in procurement) contributed to transparency in public procurement in response to the COVID-19 pandemic. When opening accounts with financial institutions, companies are generally required to disclose their beneficial ownership information. A beneficial owner is the natural person who ultimately owns, or controls, a legal person. Replicating this concept, these companies can submit that same beneficial ownership information also to procurement authorities when bidding for contracts. Conditionality in several Fund-supported programs advanced these reforms. Such reforms included the following elements: (i) requiring submission of beneficial ownership information; (ii) prima facie verification by the procurement authority; (iii) public access to the beneficial ownership information of the awarded company; and (iv) enforcement mechanisms for non-compliance or untrue submissions. The reforms helped identify the beneficial owners of companies awarded contracts, prevent conflict of interest, and brought greater transparency in public procurement. While such sectorial reform is important in the absence of national initiatives, countries with public beneficial ownership registries have an even easier task in this regard, with no additional implementation costs as long as the name of the awarded company would be known to the public, as the information on beneficial ownership would already be available.
C. CBRs
5. The 2017 Board Paper on recent trends in CBRs examines the drivers of the withdrawal of CBRs, and inter alia identifies weak AML/CFT frameworks as a contributory factor for such withdrawals. The paper also notes that factors behind CBR withdrawals are multiple and interrelated, and involve risk assessment considerations. It also identifies the need to improve AML/CFT frameworks as well as respondent banks’ application of AML/CFT preventive controls among strategies to address the withdrawal trends.
6. Staff continues to implement a multipronged approach to support its member countries to ease pressures on CBRs. Elements of this approach include: (i) monitoring trends, risks and drivers and developing policy advice in its surveillance, (ii) facilitating dialogue among stakeholders, (iii) developing policy responses in its surveillance work; (iv), tailoring CD to help affected countries strengthen their legal, regulatory, and supervisory frameworks.
7. The Fund has also been supporting the G20 Roadmap for enhancing cross-border payments. In particular, the Fund, jointly with the World Bank, has been leading Building Block 7 on safe payment corridors. The safe payment corridors framework aims to reduce the cost of remittances, de-risking, and correspondent banking pressures in lower ML/TF risk remittance corridors by decreasing the compliance and regulatory costs for remittance service providers and their banks. The framework for the remittance corridors risk assessment to identify safe payment corridors has been published on the Fund and Financial Stability Board websites. The Fund has initiated several outreach efforts to raise awareness about the benefits of implementing the safe payment corridors methodology and offers support to member countries willing to volunteer to its pilot implementation.
8. Going forward, staff will continue to analyze CBRs issues, and discuss possible solutions to reduce pressures that countries face. Notably, the diversification of international payments, including through new and evolving forms of digital money and payment systems, will have an impact on the multipronged approach and tools available to ease CBR pressures. Staff will also expand the scope of possible drivers on CBR pressures, such as the lack of international cooperation and exchange of information caused by excessive financial secrecy and data protection frameworks. Staff will continue exploring possible solutions, such as—in cases where domestic banks lose their correspondent banking relationships—the provision of financial sector services by regional financial institutions that are effectively regulated and supervised by their home jurisdiction, backed by strong bilateral cooperation between the home and host authorities.
D. Digital Money 9. The 2023 Fund Policy Paper on Elements for Effective Policies on Crypto Assets calls for countries to implement the FATF standards (which include recommendations related to VAs and VASP) to address risks to financial integrity. The Board Paper also identifies the need for countries to monitor and mitigate ML/TF risks related to decentralized finance projects and peer-to-peer transactions, which may require creative risk mitigation techniques.
10. Furthermore, the 2021 Board Paper on the Rise of Public and Private Digital Money: A Strategy to Continue Delivering on the IMF’s Mandate also recognizes the need for CBDCs and privately issued digital money to be regulated to ensure financial stability and financial integrity (see Box III.2). With the support of external donors, and in response to the increasingly high demand for assistance on AML/CFT issues in relation to Fintech/digital money, staff provided significant CD on two different fronts.
11. A CD project aimed at supporting members in implementing the FATF standards for VAs and VASPs has been rolled out at both regional and country levels. A four-day training program was notably delivered to hundreds of participants from jurisdictions in the Asia and Pacific, Middle East and North Africa (MENA), Sub-Saharan Africa, and Caribbean regions. Assistance with legal drafting, training and policy advice was also provided to countries on a bilateral basis (e.g., Albania and Georgia.). Given the demand for support in AML/CFT monitoring of VASP, tools for risk-based supervision of VASPs are currently under development.
12. Another CD project focuses specifically on CBDC. Staff is conducting in-depth analysis of the financial integrity implications associated with various CBDC design options (e.g., token vs. account-based, retail vs. wholesale, domestic vs. cross-border) and mode of implementation/distribution (direct or indirect dissemination). On that basis, it has also been assisting various members who are currently exploring CBDC (e.g., Jordan, Haiti, and Peru), and focused the discussions on raising awareness of the potential ML/TF risks and implications on a jurisdiction’s AML/CFT regime raised by design choices.
13. While some digital products, such as VAs, may raise ML/TF risks, others may greatly help the effectiveness of AML/CFT measures (Box III.2). The FATF has published a detailed report about the opportunities and challenges associated with the use of technology in AML/CFT. In a context broader than AML/CFT, the Fund and other international financial bodies are also analyzing the implications of the use of technology in finance by the authorities and regulated entities.
Box III.2. Digitalization and the Use of Technology in Fighting ML/TF
Four examples of the use of technology in AML/CFT are discussed briefly below: New forms of digital identity (ID), regulatory technology (RegTech), supervisory technology (SupTech) and distributed ledger technology (DLT).
• Digital ID has been widely adopted and supported in many jurisdictions as an alternative to traditional, paper-based forms of ID. The FATF has issued guidance to assist country authorities, reporting entities and other stakeholders in determining how digital ID systems can be used to conduct certain elements of the CDD required under its standard. A digital ID system must rely on technology, adequate governance, processes, and procedures that provide appropriate levels of confidence that the system produces accurate results. If properly used, a reliable, independent digital ID system can support identity verification, client screening, and transaction monitoring, thereby help develop a more accurate understanding of the business relationship. Digital ID may also improve customer access to financial services through mobile devices and smart phones whilst ensuring the security and accuracy of customer information through biometric information as a supplement to personal identity information. The COVID-19 crisis may have further promoted the use of digital ID as the demand for remote financial services delivery increased.
• Regtech solutions are increasingly used by regulated entities (including DNFBPs) in some instances) to facilitate compliance with their AML/CFT obligations. Technology-enabled analytic tools and AI models, in particular, can be powerful in gathering and analyzing large amount of data for a range of tasks including identity management and transaction monitoring. In addition to efficiency gains, these tools can also help improve the accuracy of information and reduce false positive alerts, thus leading to greater effectiveness in AML/CFT controls, such as customer risk assessment and transaction monitoring.
• The growing number of supervised entities (such as VASPs and other Fintech/digital money firms) as a consequence of digitalization has contributed to the increasing need for and use of Suptech by supervisors. Similar to RegTech, Suptech are technology-enabled tools that can assist with AML/CFT tasks of supervisors and other competent authorities (such as the FIU). Suptech tools can help facilitate secure, automated data collection from supervised entities, run validation tests to verify the quality, content and structure of reports, and funnel processed data into the data lake creating a consolidated, single and access-controlled data architecture. Some solutions can also automate some aspects of the ML/TF risk assessment process to inform the development of a supervisory strategy. Machine learning and AI-driven analytics can also support FIU’s analyses of suspicious transactions and identification of trends and patterns.
• DLT offers new opportunities particularly in improving traceability of transactions including on a cross border basis and global scale. This could potentially increase the monitoring possibilities by public and private sectors compared to the existing frameworks. A responsible and regulated use of DLT for data and process management purposes may also speed up the CDD process, as customers can authenticate themselves and can even be automatically approved or denied through smart contracts that verify the data. There are however important limitations to blockchain analytics, including geo-blockers (such as the virtual private network), off-chain transactions, and privacy enhancing mechanisms (such as mixers and multiple layers of encryption, stealth addresses, and ring signatures).1
An appropriate use of digital tools requires certain prerequisites: In particular, legal and regulatory clarity is crucial to enable an innovation-friendly environment while overcoming some of the associated challenges. While the responsibility for compliance with AML/CFT requirements remains with the regulated entities, the authorities have a role to play to enable innovation and allow the market to support trustworthy and proven technologies to achieve an effective AML/CFT framework. To this end, the authorities should ensure clarity in the legal framework governing the use of technology by regulated entities and the authorities while maintaining technological neutrality. The regulatory and supervisory approach to the use of technology by regulated entities should be in line with the risk-based approach, consistent, outcome-based, technological neutral, and clearly communicated (for instance by issuing guidance) to the market players. Regulatory sandbox or pilot programs are useful tools for both the authorities and regulated entities to identify the risks and the benefits of the technology and inform the design of the regulatory approach.
Staff will continue to follow the trends of leveraging the use of technology in AML/CFT and support members as appropriate to achieve greater effectiveness and efficiency including by advising on legal and regulatory frameworks.
1 See: IMF, Elements of Effective Policies for Crypto Assets (2023).
E. Climate Change
14. The AML/CFT issues were highlighted under the 2021 Fund Strategy to Help Members Address Climate Change Related Policy Challenges: Priorities, Modes of Delivery and Budget Implications. The paper recognizes the Fund’s collaboration on climate work with a range of stakeholders including multilateral institutions, standard-setting bodies, and civil society, noting, inter alia, staff’s contributions to FATF’s work on climate and environmental crimes.
15. Going forward, the Fund’s AML/CFT strategy will continue to contribute to global efforts to combat environmental crimes by mitigating its financial incentives. Staff will aim to increase understanding of risks of environmental crimes, build relevant authorities’ capacities to assess and mitigate associated ML/TF risks, and contribute to the global policy agenda on climate change and financial integrity. In this regard, staff will leverage key financial integrity and AML/CFT-related tools, including strengthening assessment of risks, effective implementation of AML/CFT preventive measures (e.g., CDD, identification of beneficial owners), enhancing risk-based supervisory approaches, strengthening financial investigation capacities, and facilitating international cooperation
Box III.3. Climate Change, Environmental Crimes, and Financial Integrity
Environmental crimes negatively affect climate and can have significant macroeconomic impact. Environmental crimes (such as forestry crimes, illegal mining, illegal fishing, and illegal wildlife trade) can result in large-scale pollution, deforestation, degradation and overexploitation of species and generate significant illicit proceeds. These can in turn threaten vital ecosystem services, destroy natural carbon sinks, and worsen climate change impacts. Economic development and growth are also hindered as environmental crimes can dispossess governments of significant fiscal revenues and deprive citizens of sustainable livelihoods. The World Bank estimated that US$7–12 billion in fiscal revenues are lost each year by resource-rich countries to illegal logging, fishing and wildlife trade (Illegal Logging, Fishing, and Wildlife Trade: The Costs and How to Combat It, 2019). Proceeds from environmental crimes often finance armed criminal or terrorist groups, which can lead to instability and insecurity as well.
Environmental crimes generate significant illegal proceeds, which continue to grow, and are linked to other proceeds-generating crimes. Environmental crimes are highly profitable to criminals, generating around US$110–281 billion annually, according to INTERPOL estimates (World Atlas of Illicit Flows, 2018). These illegal activities generate significant cross-border financial flows, which are challenging to detect especially when commingled with licit trade (e.g., timber, fish, or mineral products) or leveraging TBML activities. What makes environmental crimes even worse is the associated proceeds-generating offenses such as bribing of public officials, labor exploitation, or human trafficking, and smuggling of drugs or cash. Estimated annual growth rate of environmental crimes range from a low of 5 to 7 percent to as high as 21–28 percent. (UNEP-INTERPOL, The Rise of Environmental Crimes, 2018).
Calls for stepping up efforts to address ML risks related to environmental crimes have been intensifying. The FATF (the international AML/CFT standard setter) is stepping up its work in this area, noting that tackling ML linked to environmental crimes is often an overlooked part of a much larger solution to helping save the climate.1 Similarly, the G7 underscored the need for countries to fully implement the FATF Standards as “environmental crimes have a serious impact on the planet’s biodiversity, generate billions of dollars in illicit finance and enable corruption and transnational organized crime.”2 The G20 meanwhile called for intensified efforts to end illicit threats to nature and crimes that affect the environment, including by greater cooperation to combat IFF deriving from crimes that affect the environment.3
1 FATF, High-Level Conference on Environmental Crime (December 7, 2021).
2 G7, Finance Ministers & Central Bank Governors Communiqué (London, June 5, 2021).
3 G20, Environnent Communiqué (Naples, July 22, 2021).
F. Central Bank Transparency
16. The Central Bank Transparency Code 2021, a voluntary code to help central banks review their transparency frameworks, sets out principles on transparency on central bank policies, operations, and outcomes related to its internal AML/CFT controls as well as its external AML/CFT supervisory mandate (for central banks that have this mandate). The findings of the pilot reviews for eight countries highlighted that due to the novelty of the requirement to make disclosures on financial integrity, there is significant scope for enhancing transparency in this area. Central banks with AML/CFT supervisory mandates have only limited disclosures on the scope of their activities, such as general information on AML/CFT supervisory policies, powers, and processes. Additional disclosures would strengthen trust in this central bank function, including how: (i) they assess the ML/TF risks of the supervised institutions; (ii) they define their supervisory policies; and (iii) they allocate internal resources to these activities. Moreover, disclosures of supervisory activities convey the supervisory expectations and has an impact on the degree of AML/CFT compliance by supervised entities. Central banks also need to enhance the transparency on their internal compliance framework related to the activities and services that may give rise to ML/FT risks. When applicable, they should publish information on their internal AML/CFT framework and policies (including resource allocation) and oversight of their effectiveness. In some cases, it would be a simple step such as updating existing webpages, as the information already exists internally.
G. Trade
17. The 2023 Review of the Role of Trade in the Work of the Fund specifically identifies the role of customs agencies in the fight against the trafficking of illegal goods connected to ML/TF. The policy paper also explores the rising costs for trade payments from shrinking correspondent banking networks, particularly in countries with AML/CFT compliance concerns, as well as the role of digital currency in alleviating the impact of these pressures.
H. FCS
18. The Fund’s Strategy for Fragile and Conflict-Affected States (2022) notes that country engagement strategies (CES) for FCS will cover six pillars including possible constraints to reform implementation stemming from governance vulnerabilities and ML and TF risks. The paper also identifies AML/CFT and broader financial integrity issues (with focus on topics such as legal and institutional frameworks, enforcement against key proceeds of crime, TF) as a critical area for CD for FCS. While still nascent, AML/CFT issues have been discussed in some CES developed since the adoption of the FCS strategy in 2022. For instance, the CES for Somalia notes the need for implementation of AML/CFT-related action plan to strengthen CBRs. The CES for Congo, which notes CD as a central part of the Fund’s engagement with the country, identifies anti-corruption and AML/CFT as key CD areas. Further, the CES for Mozambique notes reform efforts in AML/CFT, among others.
19. In general, the Fund covers AML/CFT issues, where relevant, in surveillance and lending for FCS and provides tailored CD support on AML/CFT. Dependent on the vulnerabilities of the FCS members, common themes covered include measures to combat TF, reforms to mitigate laundering of proceeds of corruption (often covered as part of broader anti-corruption reforms) and organized crime, as well as the strengthening of AML/CFT frameworks to reduce CBR pressures. The Fund’s work on CFT (outlined in Box III.4) is of particular relevance for FCS, where terrorism financing could have significant macroeconomic impacts (e.g., if terrorist groups may seize control of natural resources). For instance, CFT is discussed in the Mali 2023 AIV, which notes the vulnerabilities of the mining sector to corruption and TF and urges greater transparency and AML/CFT risk-based supervision of the sector. The ECF for Somalia includes a structural benchmark on implementing targeted financial sanctions reform, in recognition of the critical need for sustained progress on AML/CFT issues. Further, reforms to combat illicit outflows from corruption are discussed in Lebanon and Ukraine (the program includes a structural benchmark related to mitigating ML risks from politically exposed persons). Engagement with Papua New Guinea (2022), Tuvalu (AIVs 2023 and 2021), and Zimbabwe included a discussion on strengthening AML/CFT frameworks to address CBR pressures. In addition, the Fund had bilateral CD engagements with Haiti, Sudan, South Sudan, and Timor-Leste on the establishment of AML/CFT legal frameworks, while Haiti, Solomon Islands, Ukraine, West Bank and Gaza, and Zimbabwe participated in multi-country and thematic AML/CFT projects.
Box III.4. The Fund’s Work on CFT
What started as a relatively modest effort is now a comprehensive, multipronged work program that benefits the entire membership in response to emerging events and global initiatives. The Fund’s work initially covered AML only. Following the events of September 11, 2001, the Fund’s work was extended to cover CFT issues. At the first No Money for Terror conference in 2018, former Managing Director Christine Lagarde said that the Achilles’s heel of terrorism is its financing. CFT issues have been addressed in broader policy discussions, including those on governance, correspondent banking, Fintech/digital money, and Islamic finance.
Staff brought its unique expertise to global CFT efforts in several areas of engagement:
• Staff covered CFT in the context of bilateral surveillance (e.g., Iran and Iraq AIVs; Turkey FSAP) and Fund-supported programs (e.g., Pakistan, Iraq).
• Staff also provided CD to improve its members’ CFT frameworks (Iraq, Tunisia, etc.). Some of the projects were exclusively focused on CFT issues. A CD project funded by Canada assisted six MENA countries in strengthening their CFT legal frameworks between 2016–2020.
• Staff also conducted research on TF matters and published in Q2 2023 a book on Suppressing Terrorism Financing: Good Practices to Enhance Effectiveness. 1 This book was researched and edited by staff with contributions from several recognized experts from other institutions, including the UN, Egmont Group of FIUs, Interpol, and Europol. It provides guidance to practitioners to better identify key challenges and good practices in strengthening their CFT frameworks.
• Staff also assessed countries against the FATF Standards, in particular Côte d’Ivoire, a country where CFT efforts are of utmost importance as it faces increasing terrorist and TF risks from groups operating in the nearby Sahel region.
• In May 2023, the Fund joined, as an observer, the UN Global Counter-Terrorism Coordination Compact. The Compact is an inter-agency platform for coordination on counterterrorism, including CFT matters. Coordination under the Compact will enable staff to better coordinate CD efforts with other providers.
Going forward, staff intends to build on the Fund’s strategy for FCS as fragility and/or conflict can further hinder the fight against TF. Those risks have potential spillover effects that materialize as TF/sanctions evasion risks. For instance, countries neighboring FCS or having financial connections with FCS facing high terrorism/TF risks might in turn experience higher TF risks. TF-related data can help gain a more in-depth understanding of such spillover effects and tailor our engagement with member countries experiencing such effects. The understanding of TF risks can also be leveraged to assess constraints to reform implementation and therefore improve staff’s engagement with member countries, including FCS, in the context of Fund surveillance, lending, and CD.
1 El Khoury, Chady, editor, “Suppressing terrorism financing, good practices to enhance effectiveness”, IMF 2023, Washington DC.
I. Small Developing States
20. The 2016 Board Paper on Small States’ Resilience to Natural Disasters and Climate Change—Role of the Fund includes a reference to the ML/TF vulnerabilities of small states, particularly distinguishing small states that operate OFCs. 3 These issues are further highlighted in the Staff Guidance Note on the Fund’s Engagement with Small Developing States (2017). The Guidance Note highlights financial stability and inclusion risks from the disruption of correspondent banking services and notes that the Fund should continue to support member countries in addressing issues from the withdrawal of CBRs, including through strengthening AML/CFT frameworks. Reputational risks from weaknesses in AML/CFT and tax frameworks are also noted as particularly high for small states engaging in higher-risk activities (offshore financial sectors and citizenship by investment programs). The Independent Evaluation Office’s (IEO) 2022 Report on the Fund’s engagement with small developing states (SDS) also highlights risks faced by SDS that operate offshore financial sectors. In general, the IEO Report notes good coverage of AML/CFT issues in engagement with SDS between 2010 and 2020, highlighting ample attention to AML/CFT issues and CBR pressures in AIVs and legislative reform on AML/CFT issues in Fund-supported programs.
J. Capital Flows
21. The 2022 Review of the Institutional View on the Liberalization and Management of Capital Flows recognizes the need for an effective AML/CFT framework implemented commensurately with ML/TF risks and in accordance with international standards. The paper thus sets out that the measures implemented in accordance with the FATF Standards, which may affect cross-border capital movement (including countermeasures and enhanced due diligence for business relationships and transactions from higher-risk countries) will not be assessed for appropriateness under the criteria established in the Institutional View.
K. 2023 Review of the Flexible Credit Line, the Short-Term Liquidity Line and the Precautionary and Liquidity Line, and Proposals for Reform
22. The 2023 Review of FCL, SLL, and PLL formally integrates AML/CFT considerations into the qualifications framework for the precautionary toolkit under the ‘effective financial sector supervision’ criterion. A FATF-listed country would be unlikely to qualify for an FCL or SLL if staff assesses that the deficiencies resulting in the listing indicate that the criterion for “effective financial sector supervision” is not met. For PLL arrangements for listed countries, countries will be expected to commit to addressing strategic AML/CFT deficiencies relevant to the financial sector supervision, supported by conditionality if critical to achieving program objectives.
3 The Board Paper notes the need to develop a robust AML/CFT framework for small states given the pressures faced on CBRs as well as the offshore nature of financial sectors in some small states.
BACKGROUND PAPER IV: THE FUND’S RELATION WITH THE FATF GLOBAL NETWORK AND EGMONT GROUP OF FIUS
Executive Summary
This background paper explores the Fund’s relationships with the FATF Global Network and the Egmont Group of FIUs (Egmont Group). In relation to the FATF, the paper discusses the FATF Standards and their evolution, the Fund’s contribution to assessments, the framework to ensure the quality and consistency of AML/CFT assessments, and the FATF’s high-risk and other monitoring jurisdictions or International Co-operation Review Group (ICRG). In relation to the Egmont Group, the paper highlights the Fund’s relationship with Egmont Group, the importance of FIUs as key AML/CFT institutions, the challenges they face, and how the Fund—in coordination with Egmont Group—could strengthen their role and functions further.
A. Background1
1. The Fund’s AML/CFT strategy and broader financial integrity issues is implemented in coordination with the FATF and other multilateral institutions. The Fund’s strategy focuses on financial integrity issues with significant macroeconomic impacts. On the other hand, the FATF works to protect the financial system against ML/TF through standard setting, assessments of all FATF and FSRB members’ AML/CFT frameworks, and typologies work. The Egmont Group aims to foster cooperation and information exchange between FIUs. Staff closely cooperates with the FATF and other international organizations through participation in and contributions to standard setting, typologies, and assessments of member countries’ AML/CFT frameworks and coordination of CD delivery.
B. The Fund’s Relation in the FATF Global Network
2. The FATF is the global AML/CFT standard-setting and monitoring body whose purpose is the development and promotion of national and international policies to combat ML, TF, and, more recently, PF. The FATF was established by the G7 in 1989 and is hosted by the OECD in Paris. As a policy-making body, the FATF works to generate the necessary political will to bring about national legislative and regulatory reforms in relation to AML/CFT. The 39-member body sets international standards to ensure national authorities can effectively go after money laundering linked to crimes, such as from drug trafficking, the illicit arms trade, cyber fraud, environmental crimes, tax crimes, and other serious crimes, and TF, and prevent them from entering the financial system. In total, more than 200 countries and jurisdictions have committed to implement the FATF standards as part of a coordinated global response to preventing ML/TF. Countries that are not a member of the FATF are a member of one or more of the nine FSRBs. These FSRBs have the status of Associate Members at the FATF, and FSRB members have access to FATF meetings and documents and can contribute to the FATF’s work (e.g., inputs in the design and update of the standards). The Fund and World Bank are observers to the FATF and the nine FSRBs.
1 Prepared by Robin Sykes, Carlos Acosta, Peter El Sharoni, and Miho Tanaka (all LEG).
The FATF Standards and Their Evolution
3. The FATF sets out 40 Recommendations on measures that countries should implement to combat ML, TF, and PF. The standards serve as the basis for a coordinated response across jurisdictions to protect the integrity of the financial system.
4. The standards are regularly upgraded to mitigate emerging threats. Since 2018, key changes were related to VAs, beneficial ownership, asset confiscation, risk understanding and mitigation, and data protection. 2 As an observer to the FATF, Fund staff contributes actively to discussions on standard setting, including by bringing issues of macro-relevance to the attention of the FATF membership, as well as highlighting Fund issues to make the standards useful for all Fund members. Together, the FATF, FSRBs, the Fund, and the World Bank periodically assess countries’ compliance with the FATF recommendations, as well as the effectiveness of the countries’ AML/CFT framework based on the 11 key goals (Immediate Outcomes) that an effective AML/CFT framework should achieve. The assessment calendar is coordinated between all 12 assessor bodies, to ensure that each country is only assessed once during the complete cycle. The FATF Network is currently finalizing the fourth round of assessments; and the fifth round is to commence shortly thereafter.
Virtual Assets and Virtual Asset Services Providers
5. In October 2018 and June 2019, the FATF revised Recommendation 15 on New Technologies, explicitly clarifying that the relevant measures in the FATF Recommendations are applicable to VsA and VASPs.3 Countries are now required to ensure that the AML/CFT framework covers VAs and that, unless prohibited, VASPs are regulated for AML/CFT purposes, and licensed or registered, and subject to effective systems for monitoring. To support the implementation of the new standard, the FATF issued a report on VAs Red Flag Indicators (September 2020) and an updated Guidance for a Risk-Based Approach to VAs and VASPs (October 2021).
2 A full list of all updates to the FATF Recommendations since the current standards were issued in 2012 is published in Annex II of the printed PDF version of the FATF Recommendations on www.fatf-gafi.org.
3 A VA is a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes. VAs do not include digital representations of fiat currencies, securities, and other financial assets. A VASP means any natural or legal person, and as a business conduct one or more of the following activities or operations for or on behalf of another natural or legal person: (i) exchange between VAs and fiat currencies; (ii) exchange between one or more forms of VAs; (iii) transfer of VAs; (iv) safekeeping and/or administration of VAs or instruments enabling control over VAs; and (v) participation in and provision of financial services related to an issuer’s offer and/or sale of a VAs.
Transparency of Beneficial Ownership
6. In March 2022, the FATF revised its standard on transparency and beneficial ownership of legal persons (Recommendation 24). The updated standard sets out the measures to prevent the misuse of legal persons for ML/TF and other predicate crimes, through the timely availability of adequate, accurate, and up-to-date information on the beneficial owner of legal persons. Among the new measures are the requirement for countries to adopt a registry approach, require companies to know their beneficial owner, require a risk-based approach to foreign legal entities, and prevent bearer shares. The Fund’s multi-pronged approach to beneficial ownership transparency is outlined in Box IV.1. It is important to the Fund that an effectively implemented beneficial ownership system also supports other non-AML-related macro-critical policy areas, such as fiscal and procurement transparency, financial sector stability, and CBRs. An example of a new requirement suggested by staff was the requirement to ensure that beneficial ownership information is available to procurement authorities. This is an AML measure that also safeguards public finances, which is of the utmost importance to the Fund.
7. In February 2023, the standard on the transparency of beneficial ownership of legal arrangements (i.e., trusts) was also revised (Recommendation 25). The revision further clarifies the obligations on trustees to obtain and hold adequate, accurate, and up-to-date information related to parties to a trust and indicates that such obligations also extend to persons holding an equivalent position in a similar arrangement. Such trusts and similar legal arrangements include not only (i) those governed under their law, but also (ii) those that are administered in their country or for which the trustee or equivalent resides in their country, and (iii) foreign legal arrangements that have sufficient links to their country.
Box IV.1. The Fund’s Approach to Beneficial Ownership Transparency
Transparency of beneficial ownership has become an increasingly important issue that has been raised across all Fund core workstreams. Lack of transparency of beneficial ownership information allows criminals to misuse legal entities (e.g., companies, trusts, and other types of corporate structures) to hide their identities and the criminal origins of their assets. This can produce all sorts of economic distortions (e.g., impact revenue collection, create asset bubbles), negatively impact economic growth, and allow criminals to infiltrate and take control of the legal economy.
Transparency of beneficial ownership can support other Fund work, including to support fiscal transparency and tax collection efforts, tackle IFF, reduce opportunities for corruption, and support transparency and governance measures. Recognizing the importance of transparency of beneficial ownership for financial and economic stability, beneficial ownership issues are raised across all areas of the Fund’s core activities, including surveillance, lending, FSAP, CD, and policy work.
Box IV.1. The Fund’s Approach to Beneficial Ownership Transparency (Concluded)
The Fund has been at the forefront of policy development in this area. In October 2022, the Fund published Unmasking Control, a comprehensive and practical handbook to help Fund members strengthen their beneficial ownership frameworks, in line with the requirements of the new FATF Standards. The guide is based on staff’s experience in engaging with member countries and suggests best practices for countries to implement comprehensive beneficial ownership frameworks. Staff has also contributed on beneficial ownership issues in other related Fund publications and outputs, such as the relevance of beneficial ownership for tax in a 2023 Working Paper on leveraging AML measures to improve tax compliance. 1
As a result of staff’s ongoing work, staff has been able to push for important reform of the international standards. Notably, in the context of the revision of the FATF Standards on transparency of legal persons and arrangements, staff successfully pushed for the adoption of a multi-pronged approach to holding beneficial ownership information, including through beneficial ownership registries, and for ensuring that beneficial ownership information is available to procurement authorities, building on staff’s experiences with beneficial ownership commitments related to the Fund’s emergency lending. Staff also successfully proposed to include foreign companies in the risk assessments and advocated for abolishing bearer shares.
Going forward, staff anticipates increased demand for staff advice and CD in this area. In particular, all countries will be required to make changes to their beneficial ownership frameworks to meet the requirements of the revised FATF Standards. Staff will continue to provide policy advice in this area, including on matters arising from recent developments, and work with other departments in the Fund to maximize the benefits of beneficial ownership transparency beyond AML/CFT across other policy areas (e.g., taxation).
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1 Mathias, Emmanuel and Adrian Wardzynski. 2023. “Leveraging anti-money laundering measures to improve tax compliance and help mobilize domestic revenues.” IMF Working Paper No. 23/83. International Monetary Fund. Washington D.C.
8. The FATF recommendations relating to domestic and cross-border asset recovery are currently under review. Staff is currently contributing to ongoing discussions to support revisions to the standards on asset confiscation (Recommendations 4 and 38). For example, in these discussions, staff is highlighting the potential usefulness of tax enforcement measures to seize and confiscate illicit proceeds, where such powers exist and can be used legally. In addition to the revision of the FATF Recommendations, staff also participates in different policy projects within the FATF Working Groups (e.g., projects on Operational Challenges Associated with Asset Recovery, and Money Laundering and the Illegal Wildlife Trade).
The Fund’s Contribution to Assessments
9. AML/CFT assessments remain an important component of the Fund’s AML/CFT work program. During the 2018 discussion of the Fund’s AML/CFT strategy, Directors reaffirmed that AML/CFT assessments are a key source of information for the Fund’s work on financial integrity issues and stressed the importance of ensuring adequate quality and consistency (evenhandedness) of assessment reports across the range of assessor bodies. They encouraged staff to participate actively, as resources permit, in the review mechanisms that had been set up for all assessments to promote quality and consistency. Directors considered it appropriate for staff to conduct one to two Fund-led assessments per year, in addition to an increased focus on quality and consistency reviews of AML/CFT assessments of other bodies. In addition, Directors requested that staff should be authorized to participate in assessments led by other AML/CFT assessor bodies on an exceptional basis (a decision that was formalized in 2020).
10. AML/CFT assessments are in-depth country reports analyzing the implementation and effectiveness of measures to combat ML, TF, and PF. The reports are peer reviews, where members from different countries assess another country. MEs provide an in-depth description and analysis of a country’s AML/CFT system, as well as focused recommendations to further strengthen its system.
11. The burden-sharing arrangements between the IMF, the World Bank,4 the FATF, and the FSRBs for conducting AML/CFT assessments have generally worked well. Assessors apply a common methodology, and staff and the FATF have collaborated closely in developing and implementing technical assistance and training programs for assessors and assessed country officials. Assessment reports generally provide a sound basis for follow-up technical assistance, and the involvement of multiple assessor bodies has enriched the ongoing discussion on possible improvements of the standard and the assessment methodology. As noted above, assessment calendars are closely coordinated to ensure that every country is only assessed once by the 12 assessor bodies. Moreover, for a staff-led assessment to be recognized as a ME, the country needs to request a staff assessment, and the other assessor body will approve, which further facilitates coordination.
12. Staff has played an active role in the global assessment process. In keeping with the Board’s decision for staff to undertake one to two assessments per year, and in line with current staff resources (given how resource intensive each assessment is, on average), staff delivers one assessment5 per year to FATF/FSRBs. Since each assessment takes more than a year to complete, in practice staff often works on two assessments at the same time (in practice, an assessment takes about 16–18 months, including preparation and publication, and conversion into a report on the observance of standards and codes (ROSC). 6
13. Not all assessments by all assessor bodies are yet of the same quality and consistency, and staff has been focusing on assisting other assessor bodies to improve their output. While all assessments examine the same issues, there have been notable differences in the quality of the reports from some assessor bodies. In response to these concerns, and in cooperation with the FATF and several of the FSRBs, staff has continued to help strengthen the FSRBs by training their assessors, providing comments on their assessment reports, participating in their plenary meetings, and preparing the authorities of countries about to undergo an assessment, as set out below in more detail. Many of the relevant assessor bodies have made significant progress in strengthening the quality of their assessments. Nevertheless, improving the quality and consistency of assessment reports remains a work in progress.
4 Due to resource constraints, the World Bank has reduced its contributions to the global assessment process.
5 It should be noted that in the period under review, the assessment process was paused for almost two years due to the COVID-19 pandemic.
6 In 2018, Directors also reconfirmed that assessment reports prepared by the FATF and the FSRBs could be converted into AML/CFT ROSCs if requested by the assessed country. For the period under review and as of September 2023, two countries (China and Côte D’Ivoire) requested the issuance of an AML/CFT ROSC.
The Framework to Ensure the Quality and Consistency of AML/CFT Assessments
14. The quality and consistency processes that had been agreed by the FATF Global Network at the time of the 2018 review of the Fund’s AML/CFT strategy are still in force.
The framework to strengthen the quality and consistency of assessments aims, inter alia, at ensuring the appropriate application of the assessment methodology and procedures across the full range of assessor bodies of FATF, FSRBs, the Fund, and World Bank (also known as the FATF Global Network, or the network) and consists of:
• Training for assessors: all assessors must have (among other requirements) successfully undergone a one-week assessor training with a focus on how to assess effectiveness.7
• Country training: To enable them to prepare successfully for the assessment process, countries are given the opportunity to have relevant stakeholders trained on the assessment process. The training is usually delivered over the course of two days and includes an overview of the standard and of the assessment methodology and procedures, as well as a discussion of how to present information on the effectiveness of AML/CFT measures.
15. Pre-Plenary Reviews: The pre-plenary review consists of two separate measures:
• External review: For every assessment, the external reviewers are designated to conduct an in-depth review of (i) the assessment team’s draft scoping note (i.e., the note that lays out the areas that assessors will pay increased attention to in the context of the assessment) and (ii) an early draft of the assessment report. The purpose of this measure is to enable independent experts to raise quality and consistency issues before the finalization of the assessment report (e.g., if the analysis is incomplete or does not support the proposed ratings). In some cases, when substantial amendments are made to the draft report based on reviewers’ comments, a second more targeted review will take place.
• Delegations’ review: Prior to their discussion at a Plenary meeting, draft assessment reports are circulated to all delegations for comments. All comments submitted are shared with all delegations. From these comments, five to seven key issues that are relevant for the quality and consistency of the report are selected for discussion by the Plenary. These discussions may result in changes to the reports and provide useful guidance for future reports.
7 For the fifth round of assessor training, the same structure and general outline as for the fourth-round training. The scope of the training will continue to be a one-week course that will include a combination of presentations covering key aspects of the fifth-round procedures and methodology, interactive discussions, practical exercises, and a mock country evaluation, however, all training materials will be revised and updated, in particular to change the practical exercises and create a new mock country evaluation.
• Post-Plenary review: Reports that have been adopted by the FATF or FSRB Plenary are circulated to all delegations throughout the network for a final quality and consistency check, which could lead to having specific issues discussed at the FATF. This additional discussion can result in the report being amended to address the quality and consistency issues prior to publication.
The FATF’s High-Risk and Other Monitored Jurisdictions
16. A key objective of the FATF and FSRBs is to assist jurisdictions with significant deficiencies in their AML/CFT regimes and to work with them to address them. This process helps protect the integrity of the international financial system by following up with countries with significant shortcomings identified in their assessment report. Countries commit to an action plan, and work with FATF members and regional peers to improve the effectiveness of the system in key identified areas. The FATF publishes the list of countries that it is working with and publicly reports on their progress or lack thereof in some cases (the FATF gray list or ICRG list). The publicity puts pressure on policy makers in the identified jurisdictions to address their deficiencies in order to maintain their position in the global economy, and the gray listing itself can have a negative impact on the economy. 8 Staff works with countries that are at risk of being grey listed, or have already been listed, and provides technical assistance to allow the countries to complete the agreed action plan as quickly as possible.
17. Jurisdictions enter the review process as a result of its assessment results, but a more riskbased focus to identifying countries would be useful. After qualifying for the process, the country has one year to address the identified issues. The FATF then prioritizes the review of those countries with more significant financial sectors (US$5 billion or more in financial sector assets). Staff supports a more risk-based approach to this process, for FATF to be able to focus on countries that indeed pose a risk to the international financial system, rather than focusing mainly on ratings and a single financial sector assets indicator. 9 During the review process, the FATF considers the strategic AML/CFT deficiencies identified both in terms of technical compliance and effectiveness of measures in place, and any relevant progress made by the jurisdiction. If the FATF deems the progress insufficient to address its strategic deficiencies, the FATF develops an action plan with the jurisdiction to address the remaining strategic deficiencies. For all countries under ICRG review, the FATF requires a high-level political commitment that the jurisdiction will implement the legal, regulatory, and operational reforms required by the action plan.
8 The Impact of Gray-Listing on Capital Flows: An Analysis Using Machine Learning (imf.org)
9 The FATF reviews jurisdictions based on threats, vulnerabilities, or particular risks arising from the jurisdiction. Specifically, a jurisdiction will be reviewed when (i) it does not participate in an FSRB or does not allow ME results to be published in a timely manner; (ii) it is nominated by a FATF member or an FSRB. The nomination is based on specific ML, TF, or PF risks or threats coming to the attention of delegations; or (iii) it has achieved poor results on its ME, specifically: it has 20 or more Non-Compliant (NC) or Partially Compliant (PC) ratings for technical compliance; or it is rated NC/PC on three or more of the following Recommendations: 3, 5, 6, 10, 11, and 20; or it has a low or moderate level of effectiveness for nine or more of the 11 Immediate Outcomes, with a minimum of two lows; or it has a low level of effectiveness for six or more of the 11 Immediate Outcomes.
18. The FATF publishes two statements at the end of each plenary meeting, in February, June, and October. These statements provide a short summary of the recent actions taken in accordance with each jurisdiction’s action plan, as well as a list of the strategic deficiencies remaining to be addressed. The two statements reflect FATF’s assessment of the different levels of risk posed at any given time by the deficiencies in the jurisdictions under review. In order to be removed from FATF monitoring, a jurisdiction must complete its action plan. Once the FATF has determined that a jurisdiction has done so, it will organize an onsite visit to confirm that the implementation of the necessary legal, regulatory, and/or operational reforms is underway, and there is the necessary political commitment and institutional capacity to sustain implementation. If the onsite visit has a positive outcome, the FATF will decide on removing the jurisdiction from public identification at the next FATF plenary.
19. Staff will continue to monitor developments in the ICRG and to play a “good office” role in relation to the ICRG process. More precisely, staff will continue providing relevant information on member countries under review, while refraining from participation in those aspects of the process that are coercive in nature. In order to help its members exit the listing, staff will continue to provide relevant policy advice in AIV Staff Reports and deploy CD on key areas of vulnerabilities.
C. The Fund’s Relation with the Egmont Group
20. As a global organization, the Egmont Group facilitates and prompts the exchange of information, knowledge, and cooperation amongst member FIUs. The Egmont Group is the international organization that brings together 166 FIUs. In many countries, the FIU is also the lead agency on AML/CFT which allows FIUs to be well positioned to support AML/CFT national and international efforts. FIUs are also trusted gateways for sharing financial intelligence domestically and internationally per global AML/CFT standards. The Egmont Group provides FIUs with a platform to securely exchange expertise and financial intelligence to combat ML, TF, and associated predicate crimes. The Egmont Group, named after the famed palace in Brussels, Belgium, where the first meeting took place, is based in Ottawa, Canada and is an observer to FATF.
21. To support the role of FIUs, the Fund developed a strong relationship with the Egmont Group since its inception. Staff attends the Egmont Group plenary and working group meetings, coordinates its CD activities to FIUs with the Group, and engages on analytical work to highlight key best practices and challenges facing the work of FIUs.
The Role of FIUs on AML/CFT Issues—Importance and Background
22. FIUs have been playing a leading role in the fight against financial crimes around the globe. Their unique role in bridging the intelligence gap between the financial sector and criminal justice authorities like law enforcement agencies (LEAs) and the prosecution make them a foundational agency in the pursuit of money launderers and the financers of terrorism. Under the FATF Standards, FIUs act as a national center for the receipt and analysis of suspicious transaction reports and other information from both the private and public sector relevant to ML, associated predicate offenses, and TF, and for dissemination of the results of that analysis to investigative authorities.
23. FIUs are governed internationally by the rules established by the Egmont Group10 (to the extent that they have attained membership in the group) as well as the FATF’s 40 Recommendations. The Egmont Group also develops guidance and research products for FIUs with respect to emerging FIU issues. The Egmont Centre of FIU Excellence and Leadership also produces training and promotes sharing of best practices among FIUs. The international standard for FIUs is the FATF Standards, notably Recommendation 29, and it applies to all countries, irrespective of Egmont Group membership.
Challenges Facing FIUs
24. Despite the wide access of information and the support given to FIUs under the FATF Standards and through the Egmont Group and the Fund, assessment reports in the FATF’s fourth round of MEs showed many challenges affecting FIUs’ ability to conduct their core functions effectively. Particularly, the reports indicated several cases of lack of understanding of key ML and TF risks at the FIU level in member countries which affected their abilities to tailor their operational and strategic analysis activities according to these risks. In other cases, where FIUs were able to understand the major ML threats in their countries, they did not have a similar understanding of TF and PF threats which negatively affected their ability to mitigate these risks.
25. Another major challenge may arise from the way FIUs are structured in the overall national AML/CFT institutional framework. Insufficient autonomy coupled with weak governance, or lack of proper access to key sources of information resulted in weak FIUs that were not able to effectively contribute to developing strong financial intelligence to support successful investigations or achieving the proper deterrence to financial crimes. A lack of follow up by law enforcement and prosecution on intelligence products from the FIU is another issue that has been observed. In many cases, key sectors (particularly some types of DNFBPs) submitted low levels of reports to the FIU. Additionally, in some countries, limited FIU resources and poor physical infrastructure are detrimental to ensuring proper and secure handling of intelligence information, which in turn affects the confidence of other stakeholders and their willingness to cooperate and share information with the FIU.
26. The diverse roles being pursued by FIUs present additional challenges. One example includes FIUs having AML/CFT supervisory responsibilities over financial institutions, DNFBPs, or nonprofit organizations (NPOs)11 without having sufficient resources or adequate legal requirements for conducting and enforcing these activities. This usually leads to more pressures on the FIU’s core functions and in lower quality supervision either due to lack of sufficient financial resources, supervisory expertise, or the proper legal tools to monitor and enforce for compliance failures.
10 For example, the Egmont Principles for Information Exchange between Financial Intelligence Units (July 2013).
11 The FATF Standards do not require NPOs to be supervised or to be designated as reporting entities
27. Finally, a fundamental feature for effective FIUs is their access to foreign financial intelligence. Such access is often provided through effective international cooperation mechanisms and most importantly through their membership in the Egmont Group and their access to the Egmont Secure Web. Several FIUs around the world are still at an early stage of development, are still not members of the Egmont Group, and require assistance to bring their operations in line with the Egmont membership requirements to avail themselves of the benefits of being a part of the Egmont network.
The Fund’s Current CD Engagement on FIU Issues
28. AML/CFT CD delivered by staff focuses on countries that have weak frameworks and lowest levels of technical capacity. Staff is engaged in projects to support the capacity of FIUs (e.g., Namibia, Suriname, Tajikistan, Timor-Leste, Vietnam, and Yemen). Assistance ranges from the review of AML/CFT laws and the governance, role and responsibilities of FIU, review of operating procedures and guidance, and implementation of risk-based supervisory systems. The establishment of FIUs in these countries is particularly critical to identify IFF that may result from ML related to corruption and other offenses, and to pursue proceeds of crime that may be laundered both locally and internationally. Recovery of such proceeds assume critical relevance in FCS, where governments can ill-afford to lose revenue needed for national development. In addition, countries with weak AML/CFT frameworks (when taken together with other geo-political and socio-economic factors) are also at increased risks of TF. In such countries, the FIU must also take a leading role in addressing such risks, given the gravity of the consequences.
Fund Policy Advice Related to FIUs Under Surveillance
29. Fund surveillance for such countries has consistently emphasized the need to strengthen the role of FIUs given their critical role in the AML/CFT frameworks of member countries, particularly in cases where FIU reforms have been weak or delayed.12 FIUs currently outside of the Egmont Group network rely on the FIUs of existing members countries to sponsor and assist them in establishing a national FIU that meets the standards for Egmont membership, which includes suitable legislative frameworks that clearly establishes the FIU’s independence and autonomy as well as adequately providing for its function, responsibilities, and powers. Attention is also usually paid to the physical facilities and the operational procedures in place.
30. Recent emerging challenges facing FIUs are related to the virtual sector and processing of big data. FIUs often do not have the capacity to deal with new technological developments (such as VA transactions) and tracing funds movements which require more advanced tools. Other challenges also include the need to manage large amounts of data from financial institutions and DNFBPs and having the proper platforms and tools to deal with large amount of data.
12 See for example second review of the Staff Monitored Program staff reports for Haiti (2023), and AIV staff report for South Sudan (2022), Timor-Leste (2022), Djibouti (2022), and Guinea (2021).
The Way Forward
31. Given the Fund’s longer-term CD engagement with members together with its lending and surveillance activities, the Fund is well placed to assist countries in effecting meaningful reforms in strengthening the role of FIUs. Staff, in coordination with Egmont Group, will continue focusing on the area of establishing appropriate legislative frameworks that can support the role of FIUs including in accessing Egmont membership, paying particular attention to the areas of FIU independence, autonomy, and governance. Staff has extensive experience and comparative advantage in this area benefiting from knowledge gained in strengthening the governance of central banks, supervisors, revenue administrations, and supreme audit institutions.
32. Staff worked with member countries to build FIU capabilities to differentiate classes of intelligence and to build useful intelligence for successful financial investigations. Past examples include Kuwait (establishing the FIU and enhancing its capacity), Guinea (provision of advice to strengthen the FIU’s structure, analytical processes, risk understanding, and financial intelligence products), Bhutan (drafting of an operating procedures manual, together with training on implementation) and Cambodia (development of a procedures manuals and delivery of training on FIU functions in collaboration with the UNODC). The enhancement of capacity also assists in building trust within the law enforcement agency community so that information is shared both ways in addition to building trust in the financial sector to ensure STRs are dealt with promptly and with confidentially. FIUs that benefited from the Fund’s CD were more able to have access to the right type and quality of information from reporting entities and domestic agencies (e.g., law enforcement, administrative information) and were able to identify the prevailing typologies and trends and use them to properly guide reporting entities.
33. The Fund’s partnerships with other agencies involved in FIU CD such as the Egmont Group, UNODC, and other donors (e.g., U.S, Australia) can also assist delivering quality CD to FIUs. In 2023, the Fund published a book on CFT that was developed in close collaboration with the UN, Egmont Group, INTERPOL, and Europol. One chapter focuses on the production and use of financial intelligence by FIUs to counter-terrorism and TF, and another discusses international cooperation efforts in CFT including through the exchange of information by FIUs. An example of future collaboration is the planned updating of the Legal Department’s FIU Handbook (initially published in 2012) in collaboration with the Egmont Group. This handbook will be updated to reflect the newer challenges for FIUs and recommend best practices and is intended as a resource for FIUs both advanced and those at an early stage of development.
BACKGROUND PAPER V: FEEDBACK FROM STAKEHOLDERS
Executive Summary
This background paper provides detailed results from staff’s consultations with internal and external stakeholders on the Fund’s AML/CFT strategy. The consultation involved the Fund’s departments, country authorities, international and regional organizations (IROs), and CSOs and included online surveys and in-person meetings. Consultations indicate that stakeholders broadly view the Fund’s AML/CFT engagement as aligned with members’ ML and TF risk and context. Deeper, risk-based coverage of these issues in Fund workstreams and improved understanding of macroeconomic impacts of financial integrity issues are identified as key areas to improve the effectiveness of the work program going forward. To this end, respondents suggested that staff should continue to strengthen engagement with both internal and external stakeholders.
A. Overview1
1. Staff held detailed consultations with internal and external stakeholders to collect feedback on the Fund’s AML/CFT work program for the review period. The Fund’s area and functional departments, country authorities, international and regional organizations, and CSOs participated in the consultations. Stakeholder input was collected through tailored surveys and supplemented by informal consultations with Fund departments and CSOs. 137 Fund country teams, 77 countries, 24 IROs2 and 14 CSOs responded to the staff survey.
2. Stakeholders had overall positive views on the implementation of the Fund’s AML/CFT program for 2018-2022. Across all surveys, a majority of stakeholders found the Fund’s coverage of AML/CFT issues in surveillance and lending to be appropriate and in line with the ML/TF risks faced by members. Respondents also had favorable responses on the usefulness of the Fund’s CD engagement and the effectiveness of its contributions to the global policy agenda.
3. Common themes emerge in stakeholders’ proposals for the way forward. Key messages from stakeholder consultations are summarized in Table V.1. Despite the differences in their engagement with the Fund on AML/CFT issues, some common themes appear in stakeholders’ proposals for the way forward. For instance, respondents agree that the Fund should focus on AML/CFT issues with macroeconomic significance and call for greater use of ML/TF risk information to tailor coverage of issues in Fund workstreams. Survey results also indicate that respondents are aligned in thematic priorities for future AML/CFT coverage: for instance, illicit financial flows and beneficial ownership transparency were identified among thematic priorities by the Fund’s area departments, country authorities, IROs and CSOs. All stakeholders also call for further enhancing internal and external coordination, through ongoing engagement and information exchange between LEG and area departments and strategic cooperation with external stakeholders. Granular responses from internal and external consultations are summarized in sections A to D.
1 Prepared by Emilia Berazategui (COM), Miho Tanaka, Kristina Miggiani, and Indulekha Thomas (all LEG)
2 The IROs survey had a 100 percent response rate with all IROs working on AML/CFT and adjacent issues participating in the survey
| Key Themes in Feedback | Mission Chiefs | Country Authorities | IROs | CSOs |
|---|---|---|---|---|
| On the Direction of Future Coverage | – Increase integration of AML/CFT issues in the Fund’s policy advice through improved understanding of macroeconomic significance of AML/CFT reforms. | – Improve tailoring of coverage to country circumstances and avoid proforma coverage. | – Increased focus on the Fund’s advantage (e.g., financial flows analysis) and deeper exploration of connections between AML/CFT and financial stability and macroeconomy. | – Continue focus on macro-criticality of AML/CFT issues. |
| – Strengthen surveillance through greater use of risk & context data (including from other workstreams). | – Continue active role in assessments, including through trainings and quality and consistency reviews. | – Greater focus on IFFs and their impacts on financial stability and the broader economy. | – Deeper coverage of AML/CFT issues in AIVs and FSAPs for IFCs where AML/CFT weaknesses can have spillover effects. | |
| On Thematic Focus Areas for Future Coverage | – Illicit financial flows (IFFs), beneficial ownership transparency, financial integrity considerations associated with fintech/digital money, and correspondent banking pressures from AML/CFT weaknesses among key thematic priorities for future engagement. | – Continue emphasis on themes including beneficial ownership transparency, IFFs, and fintech and digital money, especially through CD for countries with capacity constraints. | – Greater thematic focus on beneficial ownership transparency, IFFs, fintech and digital money, financial and tax transparency standards, and asset recovery. | – Greater emphasis on public access to beneficial ownership information across all sectors. |
| – Promotion of cooperation between AML/CFT and tax and greater focus on proceeds of predicate crimes such as corruption and environmental crimes. | ||||
| On Cooperation with Stakeholders | – Ongoing engagement with area departments and continuous information exchange key for effective coverage. | – Continue strengthening cooperation with FATF/FSRBs and other IROs and avoid duplication of work. | – Move from ad hoc coordination to strategic cooperation with IROs based on common priorities and objectives. | – Regular and close engagement with national and global CSOs and greater transparency of the Fund’s CD, particularly outcomes of the Fund’s engagement. |
B. Survey Responses from Fund’s Mission Chiefs
4. LEG extensively engaged with the Fund’s functional and area departments through informal discussions and surveys. Area departments, Africa (AFR), Asia Pacific (APD), Europe (EUR), Middle East and Central Asia (MCD), and Western Hemisphere (WHD) as well as functional departments (Strategy, Policy, and Monetary and Capital Markets (MCM)), participated in the informal consultations and a total of 137 mission chiefs responded to the survey. Respondent breakdown and response rate per department are set out in Figure V.1. The survey shows broad engagement across country team workstreams. During the period under review (2018–2022), 42 percent of the respondents have engaged on AML/CFT issues in surveillance, 14 percent in lending, and 28.5 percent in both surveillance and lending, while 6.6 percent note engagement in all three workstreams (lending, surveillance, and CD).3
5. Country teams’ feedback generally supports that the AML/CFT engagement has been aligned with member countries’ ML/TF risks and guided by the 2018 AML/CFT strategy. Survey respondents broadly agreed (with over 75 percent of respondents in agreement)4 that the coverage of AML/CFT issues across all workstreams was appropriate given the ML and TF risks faced by member countries. Similarly, respondents also noted that the AML/CFT work program is guided by the 2018 AML/CFT strategy (with over 80 of respondents in agreement). This broad agreement is reflected across different area departments (Figures V.1 and V.2).
3 One respondent noted AML/CFT engagement only related to CD.
4 This includes mission chiefs who responded ‘agree’ or ‘strongly agree’ to Q5.
6. Departmental consultations also highlight the need for greater tailoring in coverage based on an improved understanding of macro-critical impacts of financial integrity issues. Some country teams expressed concern that coverage of AML/CFT issues in Fund workstreams is superficial and over-reliant on FATF and FSRB assessments. Several respondents noted that an improved understanding of the macroeconomic significance of AML/CFT reforms would allow improved integration of these issues in overall policy advice in surveillance and build a stronger case for inclusion of AML/CFT conditionalities in programs. For instance, one respondent called for a better understanding of how AML/CFT gaps may act as transmission channels to macro-financial shocks, and/or hamper growth and economic development, or generate vulnerabilities in the financial system, to improve future coverage of AML/CFT issues in Fund workstreams. Thematically, stakeholders identified the analysis of IFF and combatting of ML in their destination jurisdictions, financial integrity considerations associated with Fintech/digital money, and correspondent banking pressures from weaknesses in AML/CFT frameworks as key priorities for future engagement.
7. On engagement modalities, consultations highlight that ongoing engagement between LEG and area departments on AML/CFT issues is key to allow appropriate coverage. Country teams expressed appreciation for LEG’s support through mission participation, input to staff reports, bilateral meetings, and interdepartmental reviews. A majority of respondents specifically noted that LEG’s virtual participation in missions was beneficial in leading the discussions on AML/CFT, while a few highlighted that in-person participation in the mission discussions would often be preferable given the sensitivity of the issues discussed, particularly on lending. Overall, consultations highlighted that an established relationship between LEG and the relevant country teams and sharing of information on a continuous basis are most conducive to effective coverage. Engagement limited to provision of comments during interdepartmental review was least beneficial, since the comments and input came too late to be appropriately discussed with the authorities and integrated in the staff report.
Surveillance
8. The consultations broadly indicate that AML/CFT issues have been appropriately covered in AIV surveillance. Over 70 percent of total respondents positively viewed engagement of AML/CFT issues in AIV surveillance and agreed that this coverage was well supported by LEG. Similarly, high trends in positive responses were observed across all surveyed area departments (Figure V.4). Several country teams appreciated instances of tailored coverage of AML/CFT issues in departmental consultations, particularly where the coverage was aligned with and informed by findings from ongoing AML/CFT technical assistance (e.g., inclusion of findings from the Nordic-Baltic technical assistance in the 2022 Lithuania AIV consultation).
9. Mission teams called for deeper analysis of AML/CFT issues in future AIVs with closer linkages with other macro-priorities. Departmental discussions and survey responses reflected a concern that AML/CFT coverage is sometimes boilerplate (based on FATF’s assessments) and disconnected from other policy advice in AIVs. Several country teams called for alignment of coverage of AML/CFT issues with other macro-critical priorities, for instance, increasing linkages between AML/CFT and issues such as governance and anti-corruption, fiscal revenue collection, and financial sector and access to global financial markets, respectively.
10. Similarly, consultations indicate that AML/CFT engagement in FSAPs is appropriate, with more forward-looking coverage encouraged going forward. Discussions with MCM indicate that AML/CFT discussions during FSAPs were relevant to the country’s ML/TF risks and the broader context of its financial sector and were complementary to the findings and recommendations across other areas. MCM mission chiefs also broadly agreed that AML/CFT recommendations in FSAPs were tailored, useful, and implementable. Some mission chiefs cautioned against adopting a backward-looking, checking-the-box approach reliant on FATF assessments, and called for tailored coverage with greater synergies with discussions on financial sector oversight.
Lending
11. AML/CFT related conditionality have been included in Fund-supported programs where critically important to achieve program objectives, as highlighted by over 70 percent favorable responses (Q13). Notably, country teams’ views on AML/CFT coverage in programs are derived from a smaller sample as only around 50 percent of the total respondents have engaged in AML/CFT issues in Fund-supported programs during the period under review. Country teams also appreciated LEG’s support for AML/CFT coverage in lending (over 75 percent favorable responses), with several respondents noting a preference for LEG’s mission participation. Despite the smaller pool of respondents, consultations and survey responses indicate greater traction for AML/CFT reforms in lending as compared to surveillance. In particular, qualitative responses highlighted instances where LEG’s support on AML/CFT issues helped achieve further program objectives as well as significant reforms in AML/CFT frameworks (e.g., Haiti, Pakistan).
12. At the same time, a few stakeholders called for evenhandedness in inclusion of AML/CFT conditionality across Fund-supported programs and emphasized the need to avoid cross-conditionality. Some country teams indicated that AML/CFT related conditionality were greater in countries exporting IFF and noted the need for greater inclusion of such conditionality in transit and destination countries for such flows, where Fund-supported programs were negotiated. On precautionary lending, respondents stressed the need for the Fund’s independent assessment of AML/CFT issues, informed by but separate from the FATF network’s assessments of AML/CFT frameworks. They noted potential reputational risks from cross-conditionality in Fund-supported programs, particularly conditionality tied to the achievement of the FATF action plans items.
CD
13. Country teams expressed broad appreciation for AML/CFT-related CD (Qs. 18, 24, 25). A majority of survey respondents considered AML/CFT-related CD to be useful to the recipient countries to support efforts to strengthen AML/CFT frameworks. These positive findings were echoed by survey respondents of countries where the Fund provided AML/CFT-related CD. Capacity constraints for competent authorities and limited political will were perceived as hurdles for implementation of CD advice.
14. Country teams highlighted the need for greater synergies between CD and surveillance and lending. In surveillance, country teams explicitly noted benefits from drawing on findings from AML/CFT CD to deepen surveillance and called for sharing of findings from CD projects with country teams on an ongoing basis. In lending, departmental discussions and survey responses underlined that technical assistance is often necessary to help countries implement AML/CFT reforms and called for swifter mobilization of technical assistance to aid implementation of AML/CFT-related conditionality
C. Survey Results from Country Authorities
15. Staff circulated a survey to all member countries to collect feedback from member countries on the Fund’s AML/CFT engagement under the review period. Eighty-two authorities from 77 countries—40.5 percent of the Fund’s membership—responded to the survey. By regional departments, 15 responses were received from AFR, 11 from APD, 37 from EUR, four from MCD, and 15 from WHD. By income levels, 32 authorities from advanced economies ((AE) based on World Economic Outlook (WEO) basis), 35 from emerging markets (EM), and 15 from LIC (based on poverty reduction and growth facility (PRGT) eligible countries) responded to the survey. There were four responses from FCS, based on the World Bank’s list of FCS. Countries listed as such in FY2019 to FY2022 are counted as FCS. Sixty-four have participated in surveillance, 50 have undergone FSAP, 15 have received Fund-supported programs/emergency lending, and 39 have benefited from the Fund’s CD activities during the last five years.
16. Overall, respondents welcomed the Fund’s targeted approach in surveillance and FSAPs guided by the country’s ML/TF risks. They emphasized the need for an increased focus on the Fund’s advantage, such as financial flows analysis and a deeper exploration of the connections between AML/CFT and the macroeconomy and financial stability. Country authorities noted the positive impact of AML/CFT-related conditionalities in Fund-supported programs on their AML/CFT framework’s effectiveness. They found the Fund’s CD program useful, particularly regional and thematic projects. Respondents underscored the importance of coordination with the FATF/FSRBs to leverage synergies and prevent duplication of work, and some called for an increase of the number of Fund-led assessments. Further, respondents encouraged the Fund’s continued emphasis on thematic areas, including beneficial ownership transparency, Fintech/digital money, and VAs.
17. County authorities found that the Fund’s engagement on AML/CFT issues across different workstreams is appropriate. Fund engagements addressed ML/TF and broader financial integrity risks faced by the respondent’s country (Q1). Respondents welcomed the Fund’s targeted approach on the country’s key ML/TF risks (Q2) and good coordination with the FATF. The Fund’s AML/CFT assessments provided useful and implementable advice for regulators and policy makers (Q3).
Surveillance
18. On surveillance, country authorities perceive the AML/CFT issues to be appropriately covered in AIV Staff Reports when those issues are macro-critical (Q4). The majority of the respondents agreed that the Fund’s AIV staff reports provided tailored, concrete, and granular advice to address ML/TF risks and AML/CFT vulnerabilities (Q5). Authorities welcomed the targeted coverage and feedback in line with the countries’ ML/TF risks and the timely update of the countries’ latest AML/CFT measures in the staff reports. Notably, one of the respondents appreciated the discussion on the risk of cross-border ML/TF based on the analysis of SWIFT data. Key suggestions included greater focus on the linkage between AML/CFT and macroeconomic/financial stability, more specific and detailed policy advice (e.g., more granular advice on specific sectors, technical discussions on riskbased approach), and closer communication with the assessed countries in developing policy advice (Q6).
FSAP 19. On FSAP, countries had positive views on the contributions made by the coverage of AML/CFT issues to the broader discussion of financial stability and soundness of the financial sector, as well as the appropriateness of the scope and depth of staff’s analysis of the AML/CFT issues. The majority of the respondents agreed or strongly agreed that the coverage of AML/CFT issues in the FSAP contributed to the broader discussion of the stability and soundness of the country’s financial sector (Q7). Respondents were generally of the view that the scope and depth of staff’s analysis on AML/CFT issues in FSAP was appropriate given the country’s ML/TF risks and the broader context of its financial sector (Q8). Respondents welcomed the Fund’s targeted approach to FSAPs and the good coordination with the FATF/FSRBs assessment reports/processes. For example, respondents expressed positive views on the Fund’s approach to use existing mutual evaluation reports and follow-up reports as a starting point, highlighting the progress made by the country since. Some noted a duplication of the Fund’s work with the existing/ongoing work by the FATF/FSRBs, calling for greater focus on the areas where the Fund can add more value. In this context, a respondent welcomed the coverage of cross-border ML/TF risks based on financial flows analysis. Respondents also emphasized the importance of highlighting the linkages between AML/CFT issues and the broader discussion of financial stability and soundness (Q9).
Fund-Supported Programs
20. The respondents had overall positive reactions on the inclusion of AML/CFT-related conditionality in the Fund-supported programs. Forty-five percent of the respondents noted the inclusion of AML/CFT-related conditionality when their countries’ AML/CFT weaknesses were assessed as severe or when they were critically important for achieving the program goals (excluding those who answered “not applicable,” the percentage is over 60 percent) (Q10). Over half agreed or strongly agreed that such conditionalities and policy commitments were targeted, specific, actionable, and in line with the country’s ML/TF risks (Q11). The majority of the respondents agreed or strongly agreed on the positive outcomes that the AML/CFT-related conditionalities brought about (Q12).
CD
21. Authorities expressed positive views on the timely and useful delivery of the Fund’s CD program and its impact on the effectiveness of their AML/CFT framework and the capacity of their public officials. The majority of them found that the technical assistance delivery was timely and useful to help their country strengthen the effectiveness of the AML/CFT framework (Q13). Respondents also found that the Fund’s training was timely and useful to help improve the capacity of their country’s public officials in charge of AML/CFT (Q14)
22. The majority of the respondents positively viewed the Fund’s AML/CFT CD support in areas needed by the country’s authorities (Q15). On modalities, over 60 percent agreed or strongly agreed that CD has been effectively delivered through in-person missions and virtual engagement (Q16). Country authorities find a wide range of the Fund publications useful, including policy papers, FSAP and surveillance reports, detailed assessment reports, books, research papers, and other publications (Q17). Authorities welcomed the Fund’s regional projects (Nordic-Baltic project) and the training programs, including those on VA/VASPs and risk-based supervision, although one of the respondents suggested that the Fund’s policy advice could be more specific. Feedback also highlighted the importance of the timing of CD delivery. While one of the respondents noted a postponement of delivery, there was another comment where the respondent appreciated the Fund’s timely assistance, which had significant positive impact on their FATF/FSRB’s assessment conducted in the same year (Q18).
Cooperation with other International and Regional Organizations
23. Respondents consider that the Fund demonstrated good coordination with other IROs. Over 60 percent of the respondents agreed that the Fund coordinates effectively with other international and regional organizations in delivering CD and training to avoid duplication of efforts (Q19). Respondents called for greater coordination to avoid overlaps in the Fund’s work and other IROs’.
Future AML/CFT Engagement
24. Respondents welcomed the Fund’s significant contribution to the global AML/CFT efforts. Going forward, respondents suggested that the Fund should continue to strengthen its cooperation with FATF, FSRBs, and other IROs in providing technical assistance, including training of assessors and countries awaiting assessments. Notably, some suggested that the Fund should increase the number of the Fund-led assessments. On thematic issues, respondents suggested that the Fund should put more focus on areas such as financial flows analysis, beneficial ownership transparency, Fintech/digital money including VAs and digital banking, cybercrime, risk-based supervision, and development of data analytic tools and methodologies for risk assessment and supervision. Measures against PF, TF risks of NPOs, CBRs, asset recovery, and further research of the economic impact of FATF-listing were also highlighted as potential areas of increased focus. A respondent from an LIC noted their capacity constraints and stressed the importance of the Fund’s assistance, particularly in enhancing beneficial ownership transparency.
D. Survey Responses from International and Regional Organizations
25. Staff received inputs from 24 international and regional organizations (with 100 percent return rate) engaged on AML/CFT issues as part of the external outreach exercise for the 2023 AML/CFT strategy review. Overall, IROs have found that the Fund’s engagement on AML/CFT issues across different workstreams is appropriate in addressing the ML/TF and broader financial integrity risks faced by its member countries, with 87.5 percent of the respondents agreeing or strongly agreeing with the statement (Q1).
26. IROs agreed that the overall effectiveness of the Fund’s AML/CFT engagement with its members is adequate. They also agree that the Fund’s work has greatly contributed to elevating the link between financial integrity, financial stability, and financial inclusion to the global policy dialogue. Going forward, IROs suggested that the Fund should continue to work on enhanced coordination with IROs, strengthening effectiveness of AML/CFT frameworks and institutional capacity, with further focus on the effective implementation of FATF recommendations, including adopting and implementing beneficial ownership systems, and mitigating ML/TF/PF risks relating to VA/VASPs.
Contributions to Global Policy Agenda
27. All IROs agree that the Fund has contributed to the global policy dialogue (Q3). The Fund’s role in emphasizing the link between financial inclusion, financial integrity, and financial stability has greatly helped raise AML/CFT issues at the domestic policy level (Q5, Q6). IROs noted that the Fund’s financial sector technical expertise and its core workstreams are important in identifying ML/TF risks that could be macro-critical. In turn, IROs have witnessed how this has increased political will in tackling ML/TF and has helped ensure AML/CFT issues receive adequate attention from finance ministries and central banks, which has stimulated additional allocation of resources (Q2, Q15). The Fund has also contributed to the global policy dialogue by providing input and feedback on various policy documents published by the FATF, FSRB, including the revision to the FATF Standards and guidance (Q3).
28. Going forward, respondents suggested that the Fund should continue leveraging its work on the macro-criticality of AML/CFT issues (Q5). According to several IROs, areas that could affect macroeconomic and financial stability such as VASPs will warrant discussions in AIV staff reports. Such discussions will assist competent authorities with the understanding, identification, and mitigation of these risks—especially when combined with technical assistance. Ultimately, this will lead to improved AML/CFT oversight, supervision, and access to financial services. Surveillance could also be strengthened with more AML/CFT risk and context data gathered from other areas of the Fund’s workstreams. For example, the Fund work on tracking data on cross-border financial flows could also help better inform policy work by the FATF on de-risking, as well as other major policy areas.
29. While IROs appreciated the coverage of AML/CFT in core functions, several appreciated the analytical work published by the Fund with most IROs (95.8 percent) mentioning the usefulness of books, research papers and Fund publications such as Unmasking Control: A Guide to Beneficial Ownership Transparency and Countering the Financing of Terrorism: Good Practices to Enhance Effectiveness.
AML/CFT Assessments
30. IROs highlighted the quality and consistency of the Fund’s work in conducting and reviewing AML/CFT assessments across the FATF Global Network (Q6, Q8, Q10). This was the most cited reason for why the Fund should continue to play an active role in conducting AML/CFT assessments in the fifth ME round (Q9, 79.2 percent agree). Most IROs agree (79.2 percent) that the Fund has contributed to conducting AML/CFT assessments and assisted other assessing bodies appropriately through reviews and other forms of support (Q7) (see Figure V.19).
31. IROs also provided suggestions to ensure the continued quality of Fund-led assessments
(Q10). These mostly relate to: (i) more involvement of the Fund and the World Bank in the ME process to ensure more quality and consistency of reports; and (ii) training to assist jurisdictions, especially country members of the FSRBs, in preparing for their ME and countries in the ICRG process.
CD
32. Respondents consider that the Fund is strong in coordinating effectively with IROs in delivering CD and training to avoid duplication of efforts (Q11, 62.5 percent agree). Most agree that the Fund offers tailored, useful, and sufficient support to IROs through its CD and training activities (Q12, 58.3 percent agree) and leverages IROs’ expertise in its joint CD and training activities (Q13, 54.2 percent agree).
33. As general feedback, IROs stressed the importance of continued coordination (Q15). A few IROs suggested that better use of local expertise could enable competency transfer and facilitate more tailored support. When engaging with CD in specific jurisdictions, a few IROs suggested that the Fund’s impact will be maximized by a detailed awareness of jurisdiction-specific financial crime issues, risks, and typologies. This also complements the call for continued focus and technical assistance on national and sectoral risk assessments by a number of IROs (Q15).
34. Thematically, CD should focus on implementing key issues under the AML/CFT frameworks. The strong work on entity transparency/ in compliance with FATF Recommendation 24 was noted and should continue. Other areas should include strengthening asset recovery, financial and tax transparency standards, Fintech/digital money (including VA/VASPs), and IFF.
Cooperation with other stakeholders
35. IROs made practical suggestions with respect to moving beyond ad hoc cooperation to facilitate strategic cooperation based on common priorities and objectives (Q6). Joint presentations and trainings, collaborative research projects, experience-sharing, and technical exchanges of experts with other IROs are a good way to reach this objective. Some IROs noted that in the last few years the Fund has been pursuing closer collaboration with IROs that have comparative advantages. In this respect, the Fund joining the Global Counter-Terrorism Coordination Compact was welcomed as a good step with respect to TF issues. This should continue while strengthening synergies in other areas. For example, considering the significant role the private sector plays on AML/CFT, a respondent suggested that the Fund should strengthen its cooperation with IROs that work with the private sector, such as the IFC (Q2, Q5, Q15). The continued cooperation on beneficial ownership frameworks and registries will also be important for the private sector (Q15).
Future Engagement
36. IROs views complement the future direction of the Fund’s AML/CFT work program, in the way it plans to continue to cooperate (e.g., cooperation with IROs in its CD delivery to avoid duplication of efforts and deeper engagement with a broader range of external stakeholders). IROs also agreed with the Fund policy priorities which also reflect the international community’s policy agenda (e.g., beneficial ownership and addressing ML/TF/PF risks relating to VA/VASPs). Cross-border payments, cyber-crime and cyber-enabled fraud, environmental crime, and asset confiscation and recovery are areas likely to increase in significance (Q5).
E. Survey Results from CSOs
37. In a new approach to collect CSOs’ feedback on the Fund’s AML/CFT work, staff engaged in a two-phase consultation process with CSOs to seek detailed views on the implementation of the strategy and recommendations for the way forward. Phase I of the consultations consisted of an online public consultation that took place from April 11 to May 21, 2023. Phase II took place in August and consisted of a virtual follow-up meeting with CSOs. This meeting focused on sharing key inputs received through the online consultation, discussing the preliminary findings, and seeking further insights on some of the issues raised and recommendations proposed. This two-phase consultation was a new approach in the 2023 review of the Fund’s AML/CFT strategy and sought to engage civil society as an important stakeholder in global AML/CFT efforts. CSOs were supportive of the two-phase consultation approach, timeliness of the consultation, publication of responses, and encouraged the Fund to replicate this model in future consultations.
38. This section offers an overview of the findings from the consultation process. It is divided into two main parts: the first one focused on the findings from the public consultation (Phase I), and the second reflects the findings from the follow-up meeting with CSOs (Phase II).
39. Below is a summary of the main take-aways from the overall consultation.
Box V.2. Key Takeaways from Public Consultation and Way Forward
Key takeaways
• CSOs had overall positive view on the implementation of the 2018 Fund’s AML/CFT strategy, as well as on the suitability and evenhandedness of the Fund’s direction in addressing financial integrity issues in AIV consultations and Fund-supported programs.
• CSOs had overall a positive view of the appropriateness of the Fund’s CD engagements on AML/CFT and of its contribution to the global AML/CFT agenda by participating in the FATF.
Way forward
• A group of CSOs suggested that the Fund should focus on the risk of IFF that can have impacts on financial stability and the broader economy, including major financial centers where ML/TF can have spillover effects by, for example, sustaining and deepening the coverage of AML /CFT issues in AIVs and FSAPs especially for IFCs.
• A group of CSOs noted that they would like to see the Fund working towards ensuring public access to beneficial ownership information across all sectors and actively promoting cooperation between tax and AML authorities.
• Some CSOs suggested that the Fund should have more regular and close engagement with CSOs working at the national level and global level on AML reforms, including by conducting CD for CSOs and sharing more information on CD and technical assistance reports.
• One CSOs expressed that the Fund should examine the connections between financial crimes such as ML and environmental crimes and another one suggested improving the transparency of CD by sharing data, including on AML/CFT and country
Phase I: Public Consultations
Answers Received and Type of Respondents
40. Staff prepared an online survey questionnaire to seek views from CSOs on the Fund’s involvement on AML/CFT issues, including on the Fund’s engagement and cooperation with CSOs and multilateral organizations. The launch of the survey was announced at a panel discussion during the Civil Society Policy Forum at the 2023 Spring Meetings.
41. A total of 19 responses5 were received from stakeholders from all over the world, including Campaign For Human Rights and Development International, Dr. Ambedakar Iok Uthan Kendar, Human Security Collective, National College of Business Administration and Economics, Open Contracting Partnership, Tax Justice Network, The Financial Accountability and Corporate Transparency (FACT) Coalition, The Sentry, Transparency International EU, and others who wished their
5 All the responses received can be found here: International Monetary Fund, “Review of the IMF’s Anti-Money Laundering and Combating the Financing of Terrorism Strategy, Public Consultation from April 11 – May 21, 2023” (Washington, 2023)
responses to be published as anonymous. Out of the 19 responses, five of them were found to be from the private sector and were therefore not considered for this exercise.
Main Findings from Online Public Consultation
42. Following the structure of the online survey, the analysis below is divided into two main areas: The Fund’s engagement on AML/CFT issues and the Fund’s engagement and cooperation with CSOs and multilateral organizations on AML/CFT. It focuses on 14 valid responses received to the online consultation. For open-ended questions, we summarized responses and key observations received from CSOs. The detailed answers received can be found below.
Fund’s Engagement on AML/CFT Issues
43. The respondents had positive views on the Fund’s direction in addressing financial integrity issues in AIV consultations and programs. Eighty-five percent of respondents agree or strongly agree that the work of the Fund on AML/CFT is guided by the review of the Fund’s strategy on AML/CFT adopted in November 2018 and the Press Release of February 2019. Additionally, nearly 70 percent of respondents agree that the direction in addressing financial integrity issues in AIV consultations and Fund-supported programs is suitable and evenhanded. However, 8 percent disagree, and 15 percent neither agree nor disagree with the statement
44. Tax Justice Network and Transparency International EU noted that, going forward, the Fund should sustain and deepen the coverage of AML/CFT issues in AIVs and FSAPs, especially for IFCs. The Sentry also noted that, while the Fund’s assessment of the AML/CFT framework of countries in AIV reports is outstanding and in line with the FATF recommendations, there are indications of large gaps between the analysis and implementation of the framework in some FCS, with massive systemic flaws.
45. Most respondents (69 percent) agree that the Fund positively contributes to the global AML/CFT agenda by participating in the FATF work and by assessing countries implementation of the international standards. Similarly, a majority of respondents agree or strongly agree with the appropriateness of the Fund CD engagements on AML/CFT (69 percent positive responses).
46. CSOs identified illicit financial flows (IFF), beneficial ownership transparency, and AML/CFT-tax synergies among thematic priorities for future work. When asked for suggestions on this topic, some CSOs, such as Tax Justice Network and Transparency International EU, suggested that the Fund should focus on the risk of IFF that can have impacts on financial stability and the broader economy, including major financial centers where ML/TF can have spillover effects. These CSOs also suggested the Fund should surpass the standards set by the FATF and work towards ensuring public access to beneficial ownership information across all sectors, extending beyond COVID-19 and procurement, and including the real estate sector, as it has done in certain cases. These CSOs also encouraged the Fund to actively promote cooperation between tax and AML authorities.
47. Other CSOs suggestions asked for further focus on fiscal issues, environmental crimes, and FCS. Open Contracting Partnership, The FACT Coalition, and The Sentry asked for further focus on public financial management including public procurement, examining the connections between financial crimes such as ML with environmental crimes, and ensuring that Fund-supported programs to FCS always include AML /CFT conditionality. One CSO, Human Security Collective, called for a standardized CD module for and with NPOs.
48. Most respondents found Fund publications such as policy papers and AIV staff reports and Fund-supported programs useful. A number of respondents also noted FSAPs, Detailed Assessment Reports, research papers and other publications (e.g., Fintech/digital money Notes, Book on Beneficial Ownership, blogs) as useful sources of information.
49. When asked how the Fund can better contribute to global AML/CFT efforts to safeguard the integrity of the financial sector and the broader economy and what areas, priority activities, risks, or issues the Fund should put more focus on in the next five years, the following suggestions were shared:
• Increase focus on cross-border ML/TF risks based on financial flows analysis, with greater attention on financial centers: Tax Justice Network, The FACT Coalition, and Transparency International EU consider that the Fund should examine weaknesses in G7 countries and other financial centers that propagate financial secrecy and excessive data protection, facilitate sanctions circumvention, and cause spillages into other countries. Tax Justice Network and Transparency International EU also consider that the Fund should focus more on AIV reports and FSAPs that specifically address major financial centers and analyze flows that exhibit little commercial justification but could indicate acceptance of IFF (e.g., utilizing SWIFT data).
• Promote Beneficial Ownership Transparency: Several CSOs believe the Fund could promote the establishment and use of public beneficial ownership registries.
• Enhance understanding on connection between financial and environmental crimes: Examine the connections between financial crimes such as ML and environmental crimes, (i.e., as illegal mining or deforestation, especially in resource-rich countries and destination countries)
• Strengthen the engagement with CSOs: One CSO noted that they would like to see more regular, consistent engagement with CSOs across all countries receiving CD support to ensure their perspectives are integrated into loan governance commitments, surveillance, and assessments early on in these processes, and that these are accessible and user friendly for CSOs to use in informing their oversight and engagement with government.
• Increase focus on the outcomes: Publicly report not just the Fund’s activities (analysis, reforms, and CD per country) on AML/CFT but also the actual outcomes of the Fund’s engagement to measure the actual impact as well as publicly recognize and embrace the Fund’s leading role in AML/CFT improvements to address debt distress and foster economic growth especially in FCS.
The Fund’s Engagement and Cooperation with CSOs and Multilateral Organizations on AML/CFT
50. The CSOs have overall positive views on the effectiveness of the Fund’s engagement with the multilateral organizations on AML/CFT issues. Sixty-two percent of the respondent strongly agreed or agreed with the effectiveness of the Fund’s engagement. Going forward, two CSOs suggested that the Fund should advocate for more ambitious standards in areas such as transparency of beneficial ownership information. There was a suggestion that the Fund should assess the effectiveness of its engagement in line with its mandate to safeguard the integrity of the financial sector and broader economy, based on financial flows analysis.
51. Coordination between the Fund and CSOs on AML/CFT. When asked what is needed to strengthen the coordination between the Fund’s engagement on AML /CFT and the work of civil society, CSOs suggested (i) increasing the regularity, proactiveness and timeliness of the Fund’s engagement with CSOs working at the national and global level on AML/CFT; (ii) ensuring all the country teams meet with CSOs; (iii) developing an annual civil society capacity building training with and for CSOs; and (iv) incorporating resources produced by CSOs to the Guidance Note for the Use of Third-Party Indicators in Fund Reports.
Phase II: Virtual Follow-Up Meeting
52. With the objective of sharing key inputs received during the first phase of the consultation and seeking further insights, a follow-up virtual meeting with those CSOs that participated at the first phase of the consultation was organized on August 30, 2023. Staff opened the meeting with an overview of the public consultation process and preliminary findings, followed by a discussion guided by three specific questions6 on reactions on the consolidated version of the responses received during phase I of the consultation, additional views that they would like to share and feedback in relation to the overall preliminary proposals for the review of the strategy on AML/CFT.
6 Do you have views/reactions on the consolidated version of the CSOs survey responses? Today is another opportunity to provide views on the IMF Strategy on AML/CFT. Do you have additional views that we should take into account? What is your feedback in relation to the overall preliminary proposals for the Review of the Strategy on AML/CFT?
53. During the meeting, CSOs shared positive reactions regarding the consolidated version of the responses received during the online survey and encouraged the Fund to replicate this consultation process in the future. When asked if they had additional views they would like to share and feedback in relation to the overall preliminary proposals for the review of the strategy on AML/CFT, CSOs emphasized the need for the Fund to focus further on IFF issues in advanced economies and financial centers. They also encouraged the Fund to go beyond the FATF Standards, particularly on beneficial ownership transparency by requesting countries to set up public registers. Finally, CSOs cautioned that generally AML and tax are topics that are dealt with in silos and encouraged the Fund to overcome this artificial division and assist its members in building bridges across both topics.
INDUSTRIAL POLICY COVERAGE IN IMF SURVEILLANCE
BACKGROUND PAPER III: RELEVANCE OF AML/CFT TO OTHER FUND POLICIES
