Ukraine and Nauru: FATF and USA mount co-ordinated attacks

The United States' Treasury has made its first orders of Countries of Primary Money Laundering Concern, as provided for in the USA PATRIOT Act.

The Designation was made on 20th December, the same day as the FATF met to decide the next moves under the NCCT programme.

There is a period of consultation - but the Treasury says it has already formed a view of what to do.

In the case of Nauru, it will be illegal for any US financial institution to have any dealings with any Nauru licensed institution unless specially exempted. The decision to do this has, seemingly, already been made and representations sought are from Nauru institutions to set out why they should be exempted.

In the case of Ukraine, the US intends to impose information gathering requirements which may last for 120 days but may be extended indefinitely.

The US Treasury Press Release is at World Money Laundering Report: Resources

The Financial Action Task Force met on 20th December to consider the current position of countries under the NCCT programme. Nauru is already subject to FATF countermeasures and Ukraine was named during 2000 as in danger of such measures unless they passed laws meeting FATF demands.

As noted in World Money Laundering Report: Online on 20th December, Ukraine passed laws several weeks ahead of the deadline but there were some problems with it, notably the exclusion of tax evasion as a predicate offence.

The FATF was not satisfied with the new law. According to the FATF: "Members of the Financial Action Task Force will apply counter-measures to Ukraine, in addition to the current application of Recommendation 21 (2). This decision is the result of Ukraine's failure to enact anti-money laundering legislation that meets international standards. On 7 December 2002, Ukraine enacted the "Law of Ukraine on Prevention and Counteraction of the Legalization (Laundering) of the Proceeds from Crime". However, this legislation does not address the main deficiencies identified by the FATF in its June 2001 review of Ukraine's anti-money laundering regime. The FATF notes the December 2002 statement by the Prime Minister of Ukraine that legislative amendments will be discussed by the Ukrainian Parliament promptly."

Ukraine remains subject to Recommendation 21 which says "Financial institutions should give special attention to business relations and transactions with persons, including companies and financial institutions, from countries which do not or insufficiently apply these Recommendations. Whenever these transactions have no apparent economic or visible lawful purpose, their background and purpose should, as far as possible, be examined, the findings established in writing, and be available to help supervisors, auditors and law enforcement agencies."

Ukraine also remains on the NCCT list.

The counter-measures expressed by the FATF seem relatively innocuous - but in practice amount to a near blocking of business with financial institutions, and others, in Ukraine. It says: "[The FATF] believes that enhanced surveillance and reporting of financial transactions and other relevant actions involving the concerned jurisdictions is required, including the possibility of:

- Stringent requirements for identifying clients and enhancement of advisories, including jurisdiction-specific financial advisories, to financial institutions for identification of the beneficial owners before business relationships are established with individuals or companies from these countries;

- Enhanced relevant reporting mechanisms or systematic reporting of financial transactions on the basis that financial transactions with such countries are more likely to be suspicious;

- In considering requests for approving the establishment in FATF member countries of subsidiaries or branches or representative offices of banks, taking into account the fact that the relevant bank is from an NCCT;

- Warning non-financial sector businesses that transactions with entities within the NCCTs might run the risk of money laundering."

The FATF made no changes to the status of Nauru, which remains subject to counter-measures.

The effect of the FATF decision is that member nations must take steps to apply some of all of the counter-measures.

First out of the blocks was the USA with the "designation as a country of primary money laundering concern" described above.

However, the requirements under the USA PATRIOT Act are more stringent than those to be applied under the FATF regime.

In the US, banks and other financial institutions will not be permitted to deal with Nauru registered institutions. The question for their banks is how far to enquire as to whether banks in other countries are dealing with Nauru businesses. Countries outside the FATF are not obliged to follow the FATF ruling - and this may lead to an increased demand for information from US banks anxious to be seen to be taking compliance as far as they can.

In the case of the Ukraine, the information gathering will be a burden on the banks both in the USA and in the Ukraine. As so often, there is a clear pushing of cost onto the private sector.

It is interesting to note that Washington DC is some six hours behind Paris, so enabling the messages to be sent out on the same day in the correct sequence.