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FATF gets into war mode to counter financing of terrorism
By Naresh Minocha
Dec 18, 2015

Naresh Minocha, a veteran journalist, specializes in telecom, energy, chemicals, agriculture, economic reforms and governance. In his over 32-years journalistic career, he has worked in different capacities for both Indian and foreign media organizations. These include Financial Express, Indian Express, Business Standard, Business India, Tehelka, the Pioneer, erstwhile Asian Chemical News, International Chemical Information Service and erstwhile asiatele.com.

His current professional engagements include Consulting Editor, taxindiaonline.com and Associate Editor, Gfiles Magazine. At taxindiaonline.com, he has been writing a popular Column known as 'The Ice Cubes' since 2005.

EVERY global crisis serves as an opportunity for international governance bodies to reinvent or revamp their respective regulatory framework. Paris-based anti-money laundering (AML) authority Financial Action Task Force (FATF) is the latest case in point.

FTAF is currently revisiting its AML and counter financing of terrorism (CFT) regulatory guidelines in the wake of growing terror incidents sponsored by Islamic State in Iraq and the Levant (ISIL) in the West.

FTAF is now firing all cylinders on CFT front after ISIL-linked Paris terror attack in November 2015 and subsequent mass shooting in California by couple of Pakistan origin.

FTAF says it is determined to "contribute to efforts to degrade and ultimately defeat ISIL as a terrorist organisation."

ISIL, which is also referred to as ISIS/IS, has sustained itself as an independent State with global funding and social networks, apart from revenue accruing from economic activities in territories it controls.

IS, Taliban and other similar terrorist entities have indeed put a question mark about efficacy and enforcement of FTAF standards across the globe.

FTAF has realized that CFT challenge is indeed gigantic due to all pervasiveness of cash economy and operation of cross-border transaction and transport of cash. It knows that CFT network has certain loopholes, some of which are perhaps difficult to detect and close. The two glaring loopholes are 1) cross-border cash deals referred to as hawala transactions over which concerned jurisdictions exercise bare minimum oversight and 2) digital media which serves both as conduit for terrorist funds transfers as well as terror plotting. More of this later in the column.

FTAF is now turning the heat on all jurisdictions that are lax in adopting and enforcing AML & CFT regulations.

In its action taken report (ATR) on AML & CFT submitted to G20 in November 2015, FTAF made a shocking disclosure on sanctions against terror outfits: "Even though there are adequate legal powers, these are not activated in practice, either in relation to UN sanctions or national sanctions. Two-thirds of jurisdictions have never taken any practical actions related to targeted financial sanctions."

ATR also revealed that most jurisdictions do not yet criminalize financing of travel for purposes of terrorism or terrorist training. This is in spite of the fact that United Nations Security Council (UNSC) Resolution of September 2014 requires member states to criminalize the financing of travel by foreign terrorist fighters for purposes of terrorism or terrorist training.

FATF has taken urgent action to incorporate the new requirements of this UNSC resolution into the FATF Recommendations.

In February 2016, it would initiate special follow-up measures for countries which have not yet criminalized terrorist financing or do not apply targeted financial sanctions against dubious entities.

In the same month, it would discuss scope for strengthening FATF Standards in areas such as implementation of the United Nations Security Council Resolutions dealing with terrorist financing.

These steps form part of initiatives that FTAF decided in Paris at a three-day meeting ending 14th December on combating the financing of ISIL, their affiliates, and other terrorist groups.

FATF will conduct an immediate analysis across all members in order to review their understanding of the risks, the challenges faced in sharing information, and how countries have responded to those challenges.

The analysis would help FTAF decide on future actions to be taken as part of adapting our comprehensive strategy to detect and prevent terrorist financing."

FATF and the Brussels-based AML Egmont Group will work together to overcome information sharing obstacles and consider updating the international standards on effective information sharing.

FTAF is working with the Counter-ISIL Financing Group (CIFG), the Egmont Group, Interpol and other stakeholders to get a complete picture of ISIL-related finances and act against identified risks.

It will update terrorist financing indicators and share them with the private sector. The FATF will hold a meeting in February to consult private sector representatives on these indicators, and discuss how to enhance information exchange with national authorities.

The FATF will also take immediate actions to improve information exchange between government authorities, between countries, and with the private sector. It has advised all jurisdictions to issue alerts to the private sector on the latest terrorist financing risks as soon as possible and calls on all members to update Interpol's foreign terrorist fighters database.

As put by a FTAF release, "Better information sharing is required between operational agencies, including domestically between national authorities, internationally between agencies and between the public and private sector. Financial intelligence has played an important role in investigations after attacks. There is an opportunity for it to play an even greater role in helping to hinder terrorist financing and contributing to the prevention and disruption of terrorism."

All such initiatives, however, might not be adequate in the absence on a new global standard on regulating and monitoring cash transactions and cash transport.

According to FTAT report on ‘Money Laundering Through the Physical Transportation of Cash' released on 30 November 2015, cash remains an important means of settlement across the globe, with an estimated USD 4 trillion in circulation and between 46% and 82% of all transactions in all countries being conducted in cash.

It notes: "Physical transportation of cash as a method of money laundering is not restricted to a particular type of crime. Although many jurisdictions report the use of this typology by drug trafficking organisations, it is also linked to the illegal trafficking of other commodities, such as alcohol and tobacco, and it is also used widely by criminals involved in other activity including tax fraud, weapons and arms smuggling, organised immigration crime and the financing of terrorism."

An issue related to cash economy is the need for banning hawala and other similar service providers" (HOSSPs). FTAF considers them as a subset of money or value transfer services (MVTS). These are financial services that involve the acceptance of cash, checks, other monetary instruments or other stores of value and the payment of a corresponding sum in cash or other form to a beneficiary by means of a communication, message, transfer, or through a clearing network to which the MVTS provider belongs.

In a report on role of HOSSPs in money laundering and terrorist financing issued in October 2013, FTAF appeared dejected when it stated: "In the first decade after 9/11, the globe has been largely ineffective in supervising HOSSPs. The international community can address the resulting vulnerability by bringing the HOSSPs under a risk-based AML/CFT regulatory and supervisory framework that is effectively implemented."

The report added: "terrorists continue to use HOSSPs to transmit funds. Terrorist exploitation of money transmitters is a function of geography, culture and financial access." It has elaborated hawala transactions that were used to fund terror attacks that hit the headlines over the years.

Keeping in view this ground reality, FTAF, in association with UNSC, must pitch for outright ban on hawala transactions as well as stringent regulation of cash economy.

The fiscal authorities have to play a reformist role in reducing the role of cash economy by reducing taxes and in improving radically the ease of paying taxes. The urge to avoid and evade taxes is a major driver of cash economy.

As regards digital world, virtual currencies (VCs) are a grey area. In a report released in June 2015, FTAF stated that "VC payment products and services (VCPPS) present money laundering and terrorist financing (ML/TF) risks and other crime risks that must be identified and mitigated.

The Paris terror attacks showed that terrorists used encrypted communication to execute the series of terror strikes across the city.

As the digital world innovates, the terrorists would get new opportunities to convert their agenda and plans into action.

All this analysis drives home the need for FTAF to not only become more vigilant. It also needs to ensure that Financial Intelligence Unit (FIU) in each country act as a real-time coordinator of all stakeholders to counter terrorist funding.

More important is need for FTAF to pitch for stringent penalties and sanctions against jurisdictions that are lax in complying with anti-terror standards set by it and UN.

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