Multilateral Development Institutions and Global Financial Crime Risk Management

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There is a growing consensus among financial crime compliance stakeholders that the current global framework for anti-financial crime (AFC) is not as effective as it could be. There needs to be more action from the international, regional and national levels to help identify and stem the flow of illicit financing.

Multilateral development institutions (MLDIs) and the measures they take, both individually and holistically, are not widely recognized in the AFC industry. This article is a deep dive on the role played by MLDIs in managing global anti-money laundering (AML) threats. It will analyze the following MLDIs while considering a combination of aspects such as jurisdictions serviced (global/regional) and the history of the institutions (historic/new):

  • Global: The World Bank and the International Finance Corporation (IFC)
  • Europe-focused: The European Bank for Reconstruction and Development (EBRD)
  • Asia-focused: The Asian Development Bank (ADB)
  • Africa-focused: The African Development Bank (AfDB)
  • New age institutions: The New Development Bank (NDB) and the Asian Infrastructure Investment Bank (AIIB)

The Roles Played by the MLDIs

MLDIs foster economic growth and they encourage financial cooperation among their member countries. They provide capital to member countries for economic development and reconstruction through loans, guarantees, risk management products and advisory services, and by coordinating responses to regional and global challenges. Billions of dollars flow through MLDIs every year to countries worldwide. For instance, the World Bank committed $45 billion in 2019 for various development projects, and the EBRD invested 9.5 billion euros ($11.4 billion) in 2018 for development projects. Thus, these institutions have deployed their own anti-money laundering/counter-terrorist financing (AML/CTF) framework to safeguard them from financial misuse, reputational risks and operational risks. Further, they play various advisory roles to facilitate countries and their financial institutions (FIs) through capacity-building activities, integrity due diligence activity and publication of debarment lists. The roles played by MLDIs are described in five broad categories.

Internal AML/CTF and Fraud Controls

MLDIs implement controls to prevent illicit activities that would constitute major predicate money laundering and terrorist financing offenses.

The ADB has considered that its operations might (inadvertently or otherwise) involve or facilitate money laundering, terrorist financing, corruption, fraud or other crimes. Therefore, the ADB’s process checks include customer identity verification as well as screening sanctions lists and debarment lists for contractors, consultants, suppliers, end beneficiaries and the intermediaries involved in the flow of funds.

The EBRD has developed an AML program that includes the following:

  • Identification of potential money laundering and terrorist financing risks
  • Screening clients and key counterparties against relevant sanction lists
  • Identification of beneficial owners
  • Regular monitoring for integrity and reputational risks that may arise during the life of a project, including money laundering and terrorist financing risks
  • Enhanced due diligence (EDD) for high-risk clients and sectors
  • Enhanced procedures for assessing risks associated with politically exposed persons

Further, as per its client domiciliation policy, the EBRD shall not provide financing where the project considered by the bank involves a counterparty or a controlling entity established in a jurisdiction that is subject to a Financial Action Task Force (FATF) call to apply countermeasures.

The AIIB has adopted measures that include the following:

  • Counterparty due diligence including customer due diligence/know your customer (CDD/KYC) checks for all counterparties and their beneficial owners before entering a relationship or during a transaction
  • Rolling review and ongoing monitoring, which includes review of the CDD/KYC of all counterparties on an ongoing basis and monitoring the counterparty activities
  • Terrorist lists and economic sanctions screening on an ongoing basis

The NDB conducts a risk assessment exercise to identify, assess and take effective measures to mitigate money laundering and terrorist financing risk for borrowers, third parties, countries or geographic areas annually. The NDB does not deal with entities that do not meet relevant requirements as identified in its integrity due diligence (IDD) procedures. It implements ongoing monitoring in a risk-based manner to detect possible money laundering, terrorist financing or related integrity risks arising throughout the life of a business relationship.

In summary, MLDIs have AML/CTF directives with clear governance as part of their regular functions.

IDD

All the MLDIs have a dedicated IDD unit and they conduct IDD as a part of their financing and nonfinancing partnerships. Before initiating any relationship or transactions with the beneficiaries, the institutions conduct detailed IDD that includes complete background profiling, corporate profiling, ownership information, political linkages, black list and negative list matches, adverse news, litigation instances and regulatory information, key risk factors and red flag summaries, network or link analysis, and more.

The EBRD carries out IDD when considering new operations that cover the following:

  • Review of companies and their shareholders using available sources
  • Study of the ownership structure of relevant entities of beneficial ownership
  • Review of the transparency and sound business reasons
  • Exploring all relevant entities and persons linked to the project, as well as any less formal associations—past or present—to assess matters of integrity and reputational concern

The institution deploys a risk-based approach and conducts more intrusive IDD where it is required.

The ADB introduced IDD for sovereign operations and commercial or other concessional co-financing to assist staff in assessing integrity and reputational risks as well as provide procedures for consideration of significant integrity risks by departments, offices and management. The ADB conducted IDD for around 2,000 projects from 2012 to 2017.

The above IDD activity of MLDIs led a few international banks to set up IDD teams (in addition to KYC/CDD and EDD activity) to manage their high-risk clients with substantial investments or risks.

Capacity Building

MLDIs help member countries build the capacity to tackle financial crime and prevent dirty money from flowing through the global financial system. The capacity-building roles MLDIs play can be broadly classified under three segments: technical assistance, risk assessment and publications.

Technical Assistance

Technical assistance is provided through assessments, reviews and learning-based training tools/products for member jurisdictions. The major activities are summarized below, though the focus may differ for each institution depending on its members’ priorities:

  • Supporting assessments around the risks and impacts of money laundering and terrorist financing
  • Implementing a risk-based approach to AML/CTF built on the assessment and developing countermeasures
  • Reviewing the effectiveness of laws, regulations and institutional frameworks and recommending improvements
  • Building capacity for systematic data collection on proceeds of crimes and associated financial flows
  • Building the capacity of financial sector supervisors for risk-based and effective supervision of the financial sector’s AML/CTF controls
  • Building the investigative capacity of investigators, prosecutors and judges for handling money laundering and terrorist financing cases, including international information exchange
  • Promoting financial inclusion by simplifying customer due diligence and AML/CTF requirements in low-risk financial products and services, as appropriate
  • Designing and implementing effective asset disclosure systems for public officials
  • Promoting international best practices around new financial products, such as mobile money

The World Bank provides client countries with risk assessment tools for preventing illicit financial flows to reinforce the integrity of financial systems. Its technical assistance offers innovative avenues for fighting crime and addressing the intersections of illicit financial flows and development that include human security, corruption, financial inclusion and the ease of doing business.

The IFC’s Correspondent Banking Relationships study observed that 25% of 300-plus banks in over 90 emerging markets reported correspondent banking relationship losses and that 72% of the banks reported face exogenous challenges, primarily correspondent banking stress and related compliance challenges.1 The IFC followed the study with “Good Practice Note: AML/CTF Risk Management in Emerging Market Banks” for banks to advance their knowledge and capabilities in risk management as well as facilitate and support the maintenance of correspondent banking relationships.2 In addition, the IFC published “Navigating Essential Anti-Money Laundering and Combating the Financing of Terrorism Requirements in Trade Finance: A Guide for Respondent Banks” to increase respondent banks’ awareness of AML/CTF requirements and developments related to trade finance.3

The ADB and ACAMS are partnering in the pilot rollout of an internationally accredited online training program to boost AML and know your customer capacities of the ADB’s trade finance program for partner banks. The ADB, in collaboration with various partner institutions, has also supported suspicious activity reporting standardization projects.

Risk Assessment

Countries’ AML/CTF regimes are assessed to diagnose their effectiveness and to identify potential risk, either as stand-alone diagnostics or in the context of a country’s Financial Sector Assessment Program.

Since 2011, the World Bank has guided over 100 countries through their national risk assessments for money laundering and terrorist financing and more than 5,000 experts in the client countries have been trained on money laundering and terrorist financing risk assessments. About 65 client countries have adopted reforms to strengthen their AML/CTF regimes with most of those reforms involving legislation. The World Bank has also conducted regional cooperation workshops in the Middle East, North Africa and sub-Saharan Africa to train law enforcement and judiciary officials on investigative techniques for counter-terrorist financing.

During 2012-2017, the ADB provided technical assistance to five jurisdictions (Cambodia, Mongolia, Papua New Guinea, Tajikistan and Timor-Leste) and assisted four Pacific jurisdictions through regional technical assistance (Fiji, Papua New Guinea, Solomon Islands and Vanuatu). In general, these technical assistance projects cover preparation of national money laundering and terrorist financing risk assessments, development of AML/CTF legislation and capacity development for financial regulators (including financial intelligence units), banks and nonbank FIs, as well as criminal justice officials including prosecutors, law enforcement and judges.

The AfDB’s policy note details that it incorporates AML/CTF issues in its policy dialogue with its member countries. The bank incorporates issues of AML/CTF in its good governance as well as economic and sector work. It also addresses issues, as appropriate, in its country strategy papers and public expenditure reviews. The bank’s approach is based on a combination of advocacy, dialogue, research and consultation with various national, regional and international stakeholders.

Publications

MLDIs publish various kinds of articles for managing the financial crime risk. A few examples include the following:

  • The World Bank report, “Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism”4
  • The World Bank report, “The Decline in Access to Correspondent Banking Services in Emerging Markets: Trends, Impacts, and Solutions”5
  • As already detailed, IFC publications pertaining to correspondent banking relationships from 2017 to 2019
  • The ADB’s handbook on AML/CTF for nonbanking FIs6

Debarment Lists and Negative Lists

MLDIs debar firms and individuals that have engaged in AML/CTF, fraud and corruption in financed projects. All those firms and individuals on debarment lists and negative lists are ineligible to participate in or be awarded a contract in any projects and activities until the expiration of their respective debarment periods.

The World Bank lists the firms and individuals that are ineligible to be awarded a World Bank-financed contract because they have been sanctioned under the World Bank’s fraud and corruption policy and guidelines.7 Further, cross-debarment by multiple institutions has been made applicable (in accordance with the “Agreement for Mutual Enforcement of Debarment Decisions” dated April 9, 2010) by the World Bank, the ADB, the EBRD, the Inter-American Development Bank and the AfDB. IFC exclusion lists and debarment lists serve the same purpose for the IFC.

The AIIB sanctions firms and individuals that have engaged in fraud and corruption in AIIB-financed projects, contracts and activities in violation of its policies. In addition, the AIIB also recognizes the sanctions of other international organizations.

In April 2020, the AfDB announced debarment of an entity for 18 months for fraudulent practices (i.e., misrepresentation of its year of incorporation, value of its reference contracts and the experience of its key personnel while bidding for two tenders).

Policy Development and Advocacy Roles in Global Forums

The MLDIs support various development challenges related to issues around AML/CTF and provide a strong voice for developing countries in global forums. They contribute to global discussions on a wide range of issues including anti-corruption, financial inclusion, de-risking by correspondent banks, trade-based money laundering, environmental crime and more. At a national level, MLDIs work with AML/CTF-relevant authorities in the financial, legal and law enforcement sectors. At an international level, they work with FATF and FATF-style regional bodies, the leading industrial nations known as the G-7, the leading rich and developing nations known as the G-20, the United Nations, the Organisation for Economic Co-operation and Development, the Egmont Group of Financial Intelligence Units, as well as regional organizations and civil society organizations.

Many MLDIs function as observers for FATF, including the ADB, the AfDB, the World Bank, the EBRD, the NDB and the AIIB. The criteria for FATF observer status includes the organization having a stated role related to AML/CTF, endorsing the FATF Recommendations, enhancing FATF’s global reach, contributing to the work of FATF and participating in the work of FATF-style regional bodies. MLDIs also attend the periodic FATF plenaries and working group meetings.

Need for Additional Measures

The following are aspects that still require attention and detailed information in regards to MLDIs:

  • Regulatory compliance requirement: MLDIs operate in multiple geographies and it is not clear which jurisdictional AML/CTF regime will apply to these institutions (i.e., either the home jurisdiction where the respective MLDI is headquartered or the host country where the actual lending/final transaction occurs). For instance, the list of reporting institutions and the definition of covered FIs by the regulatory guidelines of various countries does not include MLDIs. This might be because this type of institution falls under extraterritorial organizations and bodies.
  • Suspicious activity report statistics: There is no data or statistics on suspicious activity reports (SARs) reported by MLDIs and it is not clear where they should file their SARs (i.e., the financial intelligence unit of the jurisdiction where they are headquartered or the country where the suspicious nature of the specific activity was identified). Reports on SARs filed within the United Kingdom (U.K.),8 the U.S.9 and the Philippines10 did not indicate any SAR being filed by any of these MLDIs.
  • Currently, there is not much known regarding MLDIs sharing information in public-private partnerships
  • Sharing intelligence between FIs: As of late, FIs have been convening and sharing intelligence to aid in the fight against financial crime. The Joint Money Laundering Intelligence Taskforce in the U.K., the AML/CFT Industry Partnership in Singapore, and the Fraud and Money Laundering Intelligence Taskforce in Hong Kong are recent examples. Currently, there is not much known regarding MLDIs sharing information in public-private partnerships. Therefore, there would be significant benefits for all if MLDIs participate in this intelligence sharing.

Conclusion

As elaborated in this article, MLDIs play significant and diverse roles in fighting financial crime globally. Further integrating MLDIs with other stakeholders in the financial crime compliance world would be a win-win situation for all parties as it would help address money laundering, terrorist financing and fraud on a wider community level. 

Anandan Murugesan, CAMS, senior subject-matter expert, director in an international bank, Singapore, anandan3april@gmail.com

Govindaraja Venkatesan, regulatory compliance and financial crime compliance consultant, India, vgovindaraja@gmail.com

Acknowledgement: The authors acknowledge that the above study would not have been possible without the accessible content made available by the MLDIs in their respective websites and other public domains searches and articles.

The views expressed are personal and in no way reflect the views of any of the past or current employers of the authors. The information required for the article has been collated from publicly available sources and analyzed based on authors’ insights and experience.

  1. “De-Risking and Other Challenges in the Emerging Financial Sector: Findings from IFC’s Survey on Correspondent Banking,” International Finance Corporation, September 1, 2017, https://www.ifc.org/wps/wcm/connect/25c31ad1-84dc-4147-88fc-36be12c17397/201709_ifc-2017-survey-on-correspondent-banking-in-ems-final_v2.pdf?MOD=AJPERES&CVID=mpzp1qx
  2. Anti-Money-Laundering (AML) & Countering Financing of Terrorism Risk Management in Emerging Market Banks,” International Finance Corporation, https://www.ifc.org/wps/wcm/connect/industry_ext_content/ifc_external_corporate_site/financial+institutions/resources/aml-cft-risk-management-emerging-market-banks-good-practice-note-062019
  3. “Navigating Essential Anti-Money Laundering and Combating the Financing of Terrorism Requirements in Trade Finance: A Guide for Respondent Banks,” International Finance Corporation, September 2018, https://www.ifc.org/wps/wcm/connect/bde5bd94-46a9-43be-862d-379708973e9c/20180918_Guide-for-Respondent-Banks.pdf?MOD=AJPERES&CVID=mpuzBch
  4. “Reference Guide to Anti-Money Laundering and Combating the Financing of Terrorism : Second Edition and Supplement on Special Recommendation IX,” World Bank, 2006, https://openknowledge.worldbank.org/handle/10986/6977
  5. “The Decline in Access to Correspondent Banking Services in Emerging Markets: Trends, Impacts, and Solutions,” World Bank, http://pubdocs.worldbank.org/en/786671524166274491/TheDeclineReportlow.pdf
  6. “Handbook on Anti-Money Laundering and Combating the Financing of Terrorism for Nonbank Financial Institutions,” Asian Development Bank, 2017, https://www.adb.org/sites/default/files/publication/184373/handbook-aml.pdf
  7. “Procurement – World Bank Listing of Ineligible Firms and Individuals,” World Bank, https://projects.worldbank.org/en/projects-operations/procurement/debarred-firms
  8. “UK Financial Intelligence Unit Suspicious Activity Reports Annual Report 2019,” National Crime Agency, 2019, https://www.nationalcrimeagency.gov.uk/who-we-are/publications/390-sars-annual-report-2019/file
  9. “Suspicious Activity Reports Statistics (SAR Stars),” Financial Crimes Enforcement Network, https://www.fincen.gov/reports/sar-stats
  10. “Suspicious Transaction Report Quality Review,” Anti-Money Laundering Council, 2017, http://www.amlc.gov.ph/images/PDFs/STR%20QUALITY%20REVIEW.pdf

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