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350520Referenc1money01offi 35052 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism Second Edition and Supplement on Special Recommendation IX Paul Allan Schott Public Disclosure Authorized Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism Second Edition and Supplement on Special Recommendation IX Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism Second Edition and Supplement on Special Recommendation IX © 2006 The International Bank for Reconstruction and Development/The World Bank/ The International Monetary Fund 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: [email protected] All rights reserved First printing of Second Edition and Supplement on Special Recommendation IX, January 2006 1 2 3 4 5 10 09 08 07 06 This volume is a product of the staff of the International Bank for Reconstruction and Development/The World Bank/The International Monetary Fund. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the World Bank, the International Monetary Fund, their Executive Directors, or the governments they represent. The World Bank and International Monetary Fund do not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of the World Bank or International Monetary Fund concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development/The World Bank/The International Monetary Fund encourage dissemination of their work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center Inc., 222 Rosewood Drive, Danvers, MA 01923, USA; telephone: 978-750-8400; fax: 978-750-4470; Internet: www.copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: [email protected]. ISBN: 0-8213-6513-4 ISBN-13: 978-0-8213-6513-7 eISBN: 0-8213-6514-2 DOI: 10.1596/978-0-8213-6513-7 Library of Congress Cataloging-in-Publication Data has been applied for. Cover and publication design: James E. Quigley, World Bank Institute. Cover photos: Comstock. www.amlcft.org iv Contents Foreword ix Acknowledgments xi Abbreviations and Acronyms xiii Introduction: How to Use this Reference Guide xv Part A: The Problem and the International Response Chapter I: Money Laundering and Terrorist Financing: Definitions and Explanations I-1 A. What Is Money Laundering? I-2 B. What Is Terrorist Financing? I-4 C. The Link Between Money Laundering and Terrorist Financing I-5 D. The Magnitude of the Problem I-6 E. The Processes I-7 F. Where Do Money Laundering and Terrorist Financing Occur? I-9 G. Methods and Typologies I-9 Chapter II: Money Laundering Impacts Development II-1 A. The Adverse Implications for Developing Countries II-2 B. The Benefits of an Effective AML/CFT Framework II-7 Chapter III: International Standard Setters III-1 A. The United Nations III-2 B. The Financial Action Task Force on Money Laundering III-7 C. The Basel Committee on Banking Supervision III-13 D. International Association of Insurance Supervisors III-16 v Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism E. International Organization of Securities Commissioners III-18 F. The Egmont Group of Financial Intelligence Units III-19 Chapter IV: Regional Bodies and Relevant Groups IV-1 A. FATF-Style Regional Bodies IV-1 B. Wolfsberg Group of Banks IV-4 C. The Commonwealth Secretariat IV-8 D. Organization of American States–CICAD IV-9 Part B: The Elements of an Effective AML/CFT Framework Chapter V: Legal System Requirements V-1 A. Criminalization of Money Laundering V-2 B. Criminalization of Terrorism and the Financing of Terrorism V-15 C. Seizure, Confiscation, and Forfeiture V-15 D. Types of Covered Entities and Persons V-19 E. Supervision and Regulation—Integrity Standards V-23 F. Laws Consistent with Implementation of FATF Recommendations V-26 G. Cooperation Among Competent Authorities V-26 H. Investigations V-27 Chapter VI: Preventive Measures VI-1 A. Customer Identification and Due Diligence VI-2 B. Record Keeping Requirements VI-16 C. Suspicious Transaction Reporting VI-18 D. Cash Transaction Reporting VI-24 E. Balancing Privacy Laws with Reporting and Disclosure Requirements VI-26 F. Internal Controls, Compliance and Audit VI-27 G. Regulation and Supervision—Integrity Standards VI-27 H. Legal Entities and Arrangements VI-28 Chapter VII: The Financial Intelligence Unit VII-1 A. Definition of a Financial Intelligence Unit VII-3 B. Core Functions VII-4 C. Types or Models of FIUs VII-9 D. Possible Additional Functions VII-15 E. Organizing the FIU VII-17 vi Contents F. Privacy Safeguards VII-19 G. Information and Feedback VII-23 Chapter VIII: International Cooperation VIII-1 A. Prerequisites for Effective International Cooperation VIII-2 B. General Principles of International Cooperation Against Money Laundering VIII-5 C. International Cooperation Between FIUs VIII-6 D. International Cooperation Between Financial Supervisory Authorities VIII-8 E. International Cooperation Between Law Enforcement and Judicial Authorities VIII-11 F. Considerations for Fiscal Matter Offenses VIII-13 Chapter IX: Combating the Financing of Terrorism IX-1 A. Ratification and Implementation of United Nations Instruments IX-2 B. Criminalizing the Financing of Terrorism and Associated Money Laundering IX-4 C. Freezing and Confiscating Terrorist Assets IX-5 D. Reporting Suspicious Transactions Related To Terrorism IX-7 E. International Cooperation IX-8 F. Alternative Remittance Systems IX-9 G. Wire Transfers IX-10 H. Non-Profit Organizations IX-12 I. Cash Couriers IX-13 J. Self-Assessment Questionnaire on Terrorist Financing IX-17 Part C: The Role of the World Bank and International Monetary Fund Chapter X: World Bank and International Monetary Fund Initiatives to Fight Money Laundering and Terrorist Financing X-1 A. Awareness Raising X-3 B. Development of a Universal AML/CFT Assessment Methodology X-5 C. Building Institutional Capacity X-6 D. Research and Analysis X-9 vii Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism Annexes I. Websites for Key Organizations, Legal Instruments, and Initiatives Annex I-1 II. Other Useful Websites and Resources Annex II-1 III. United Nations Anti-Terrorist Conventions Referred to in the International Convention for the Suppression of the Financing of Terrorism Annex III-1 IV. The Financial Action Task Force Forty Recommendations on Money Laundering and Interpretative Notes Annex IV-1 V. The Financial Action Task Force Special Recommendations on Terrorist Financing Annex V-1 VI. The Financial Action Task Force Interpretative Notes and Guidance Notes for the Special Recommendations on Terrorist Financing and the Self-Assessment Questionnaire Annex VI-1 VII. Cross-Reference of The Forty Recommendations to Reference Guide Annex VII-1 VIII. Cross-Reference of the Special Recommendations to Reference Guide Annex VIII-1 Diagrams The Processes of Money Laundering and Financing of Terrorism I-8 viii Foreword fforts to launder money and finance terrorism have been evolving rapidly Ein recent years in response to heightened countermeasures. The internation- al community has witnessed the use of increasingly sophisticated methods to move illicit funds through financial systems across the globe and has acknowl- edged the need for improved multilateral cooperation to fight these criminal activities. The World Bank and International Monetary Fund developed this second edition of the Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism to help countries understand the new international standards. The Reference Guide will hopefully serve as a single, comprehensive source of practical information for countries to fight money laundering and terrorist financing. It discusses the problems caused by these crimes, the spe- cific actions countries need to take to address them and the role international organizations, such as the Bank and the Fund, play in the process. We offer this new version as a tool for countries to establish and improve their legal and institutional frameworks and their preventive measures accord- ing to the new international standards and best practices. This Second Edition of the Reference Guide and Supplement on Special Recommendation IX will also be translated into Arabic, Chinese, French, Portuguese, Russian, and Spanish in order to better serve a broader audience. We intend to keep the Reference Guide under review as money launder- ing and terrorist financing trends and techniques, as well as the international response, evolve and to update it as necessary. We welcome your feedback and recommendations on how this resource can be more useful. Margery Waxman R. Barry Johnston Jean-François Thony
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