Money laundering: high risk countries also in Europe

in Financial Services, 25.10.2018

The Financial Action Task Force (FATF) is constantly updating its country risk assessment. Whilst the list of high-risk jurisdictions include the usual suspects, there is surprisingly one European country on the list, making this is another challenge to be tackled by financial intermediaries.

Background and current high risk countries

As at end of June 2018, the FATF identified 8 jurisdictions with deficiencies in their anti-money laundering and/or combating the financing of terrorism regime (AML/CFT) – i.e. Ethiopia, Pakistan, Republic of Serbia, Sri Lanka, Syria, Trinidad and Tobago, Tunisia and Yemen. Although these countries committed to develop and improve their AML/CFT regimes and national compliance efforts, they are currently considered high-risk countries for AML/CFT purposes. The Democratic People’s Republic of Korea and Iran remain high-risk jurisdictions.

In the middle of Europe

In February 2018, the Republic of Serbia made a high-level political commitment to work with the FATF to strengthen the effectiveness of its AML/CFT regime. It will therefore be further assessed and subject to enhanced supervision by the FATF. Despite this commitment, the Republic of Serbia is still considered a high-risk country by the FATF and financial intermediaries need to take appropriate measures.

Imagine a retail bank serving a number of Serbian clients domiciled in Switzerland. As with other foreign nationalities living in Switzerland, there are the usual ties to the home country which also result financial transactions from and into these countries.

Do financial intermediaries now have to flag relationships with a nexus to the Republic of Serbia as high-risk relationships? The answer is simple: yes, beginning as at 1 January 2020 the latest. For instance, the same applies to Pakistani businesses and individuals who often use offshore banking services.

When should financial institutions apply stricter duties of due diligence?

FINMA’s revised Anti-Money Laundering Ordinance is very explicit and sets out the following criteria for relationships requiring enhanced due diligence (among others):

  • Domicile of the contracting party, controlling person or beneficial owner in a FATF risk country;
  • Nationality of the contracting party or beneficial owner in a FATF risk country;
  • Business activity of the contracting party/beneficial owner in FATF risk country; or
  • Recurring payments from and into a FATF risk country.

This will bring a substantial population of client relationships into the high-risk client bucket, subject to recurring reviews and senior management approvals.

Other financial institutions will likely screen transactions from and into FATF high-risk countries closely. One should therefore not neglect the new circumstances and prepare accordingly. Business relationships with other financial counterparties (e.g. US financial intermediaries, correspondent banks) may be at risk if internal processes and controls are not appropriate (e.g. transaction screening).

Banks are not always that good in cost-covering pricing models. Management should therefore also think about how these developments will impact internal costs and how or whether those costs are passed on to the client relationships concerned.

Questions financial institutions should ask themselves

  • Which part of my client population and structure has a nexus to FATF high-risk countries?
  • Are my processes appropriate to identify new/amended FATF risk countries?
  • Do I have the risk criteria ready to identify affected relationships?
  • Are my monitoring routines effective to identify and flag FATF high-risk country affected relationships?
  • Do we have sufficient resources to handle the recurring reviews of additional high risk relationships, including senior management approval?
  • Do I need to amend my existing reporting mechanism?
  • Is there any need to amend internal policies and/or manuals?

 

 

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