SECRETARIAT GENERAL DIRECTORATE GENERAL HUMAN RIGHTS AND RULE OF LAW DGI(2013)16 Strasbourg, 11 October 2013 TECHNICAL PAPER OF THE DIRECTORATE GENERAL HUMAN RIGHTS AND RULE OF LAW Information Society and Action against Crime Directorate Action against Crime Department prepared on the basis of the expertise by Mr Herbert Zammit LaFerla ON Regulation 16 (formerly Rule X) of the Central Bank of Kosovo1 on the prevention of money laundering and the financing of terrorism, including Advisory Letter 2007/1 And Drafting of administrative directives regarding employee training programmes, and the collection and processing of statistics as set out in Financial Action Task Force (FATF) recommendation 18. ECCU-BO-Kos-5/2013 1 “All reference to Kosovo, whether to the territory, institutions or population, in this text shall be understood in full compliance with United Nations Security Council Resolution 1244 and without prejudice to the status of Kosovo.” Table of contents 1. Executive Summary ................................................................................................................................. 4 2. Introduction .............................................................................................................................................. 6 3. Methodological Basis and Approach adopted ..................................................................................... 6 4. Relevant legal issues .............................................................................................................................. 7 5. Memorandum of Understanding ............................................................................................................ 7 6. Proposed Regulation 16 .......................................................................................................................... 8 7. Advisory Letter 2007/1 .......................................................................................................................... 16 8. Proposed Administrative Directive No 1 - Training ........................................................................... 16 9. Proposed Administrative Directive No 2 - Statistics .......................................................................... 18 10. Overall Opinion .................................................................................................................................. 20 11. Conclusion ......................................................................................................................................... 21 12. ANNEXES............................................................................................................................................ 22 12.1 Annex 1: Extracts of Memorandum of Understanding between the Financial Intelligence Unit and the Central Bank of Kosovo* with proposed amendments .......................................................................... 22 12.2 Annex 2: Regulation 16 ............................................................................................................... 24 12.3 Annex 3: Advisory Letter 2007-1 ................................................................................................. 90 12.4 Annex 4: Proposed Administrative Directive No.1 on Training ................................................. 104 12.5 Annex 5: Proposed Administrative Directive No. 2 on Statistics .............................................. 113 For more information, please contact: Economic Crime Cooperation Unit Action against Crime Department Tel: +33 3 90 21 42 14 Directorate General Human Rights and Rule of Law Fax: + 33 3 88 41 27 05 Council of Europe Email: [email protected] 67075 Strasbourg CEDEX France * see footnote 1 page 1 2 List of Acronyms AML/CFT Anti-Money Laundering / Countering the Financing of Terrorism BO Beneficial owner CBK Central Bank of Kosovo* CDD Customer Due Diligence CoE Council of Europe DAR Detailed Assessment Report EU European Union FATF Financial Action Task Force FIU Financial Intelligence Unit MoU Memorandum of Understanding PEP Politically Exposed Person STR Suspicious Transaction Report UNMIK United Nations Interim Administration Mission in Kosovo * see footnote 1 page 1 3 1. EXECUTIVE SUMMARY The purpose of this Technical Paper is to provide the Central Bank of Kosovo* (CBK) with an in-depth review of Regulation 16 on the prevention of money laundering and the financing of terrorism to be issued by the CBK to banks and financial institutions implementing the provisions of the Law on AML/CFT in replacement of the current Rule X including Advisory Letter 2007/1. The Paper further provides for the development and drafting of two Administrative Directives for the purposes of providing principles and parameters for training and for collecting comprehensive and meaningful statistics related to the prevention of money laundering and the financing of terrorism. It should be noted that the Cycle 1 Detailed Assessment Report (Cycle 1 DAR) on Kosovo’s* compliance with the international standards in the area of anti-money laundering and combating the financing of terrorism prepared in the framework of the Joint European Union/Council of Europe Project against Economic Crime in Kosovo* (PECK) had identified that the issue of Rule X and its accompanying Advisory Letter 2007/1 had no legal basis as the UNMIK Regulations upon which they were issued were now abrogated through the coming into force of the Law on AML/CFT and the Law No. 04/L-093 on Banks, Microfinance Institutions and Non-Bank Financial Institutions (hereinafter ”Law on Banks”). The exercise has been undertaken taking account of the above problems which to date have not been completely resolved. In reviewing the proposed Regulation 16 the Paper takes note of the February 2013 revisions to the Law on AML/CFT, the findings and recommendations of the Cycle 1 DAR and the 2012 FATF Standards. On the other hand, the development of the two Administrative Directives also take into account the views of the EU Commission on training and statistics within the context of the international standards and their effect on jurisdictions in demonstrating the effectiveness of their preventive systems. In the light of the present legislative provisions the Paper recommends interim measures to enable the CBK to issue these documents pending enactment of appropriate legal provisions. Such interim measures, through proposed amendments to the Memorandum of Understanding (MoU) between the FIU and the CBK (see Annex 1), are also applied to the issue of the proposed new Administrative Directives on training and statistics. The Paper finds that there are extreme dangers, ambiguities and legal conflict for the CBK to issue the Regulation and the Administrative Directives on the basis of its powers under the Law on Banks as such powers are available for prudential purposes only. At the same time any administrative measures for non-compliance under the Law on Banks do not cover non-compliance with the Law on AML/CFT which law provides for administrative measures for reporting subjects who do not comply accordingly. A major overhaul is proposed for Regulation 16 in particular as regards the integration of Advisory Letter 2007/1 into the Regulation; supervisory powers and sanctions; the appointment and responsibilities of the Head of the AML/CFT Unit; measurement of effectiveness through statistics; risk assessments and the risk based approach; and Customer Due Diligence (CDD) including mandatory and other high risk situations together with the obligation to develop a Customer Acceptance Policy on the basis of an institution’s risk appetite. Detailed revised text is provided together with detailed explanatory notes in Annex 2 to this Paper. Although it is being strongly recommended that Advisory Letter 2007/1 be integrated within the revised Regulation 16, yet it is acknowledged that such a decision is at the discretion and prerogative of the CBK. Consequently, Advisory Letter 2007/1 has also been reviewed as a stand-alone document (see Annex 3) should the CBK decide not to integrate it in the Regulation. Integration of the two documents remains highly recommended due to duplication of text which raises concern and ambiguity for the financial sector to follow obligations there-under. * see footnote 1 page 1 4 As requested by the CBK two new Administrative Directives for banks and financial institutions are proposed. The Directives address training and the collection of meaningful statistics, and are applicable to all banks and subsidiaries and branches of foreign banks, non-bank financial institutions and Micro Finance Institutions and subsidiaries and branches of similar foreign institutions licensed by the CBK to operate in Kosovo* in terms of the Law on Banks. It is proposed to issue them as the interim measures through the MoU until the enactment of a stronger legal basis through proposed amendments to the Law on AML/CFT. The proposed Administrative Directive No 1 on Training does not provide a training programme for banks and financial institutions to adopt and implement. The responsibility to develop training programmes for the prevention of money laundering and the financing of terrorism remains the responsibility of banks and financial institutions and may vary from one institution to another depending on a number of individual circumstances. The proposed Administrative Directive does however provide minimum principles on the basis of which banks and financial