As mentioned briefly in the previous post, FATF introduced new measures to complement its existing set of recommendations. For today, I will go through each of the new measures, one by one, to give you more detailed explanation. Here we start!
Regulation against the Financing of Proliferation of Weapons of Mass Destruction (WMD)
Proliferation of WMD is one of the most significant international security issues, demanding an effective financial regulation against terrorist financing. Upon request by the UN’s Security Council, FATF implemented ‘Targeted Financial Sanction.’ By definition, Targeted Financial Sanction means both asset freezing and prohibitions to prevent funds or other assets from being made available, directly or indirectly, for the benefit of designated persons and entities for the purpose of prevention and disruption of the financing of proliferation of WMD. Under this new recommendation, FTTF member countries are to comply with the UN Security Council resolutions. This is a preventive measure to stop the flow of funds or other assets to terrorist groups. As we may notice, compliance with FATF recommendation is not merely a financial regulation, but an international cooperation in world politics.
Enhanced Due Diligence (EDD) for Politically Exposed Person (PEP)
By definition, Domestic PEPs are individuals who are or have been entrusted domestically with prominent public functions. Those individuals are more likely to be exposed to corruptions, due to their positions and influences. Hence, financial companies are required to do EDD for them. EDD include more particulars of a customer by checking the parties to a transaction, source of funds, and purpose of transactions. By carrying out this enhanced supervision, FATF expects less corrupt financial system with fewer cases of money laundry.
Risk Based Approach (RBA)
Each of FATF member countries should understand dangers of money laundry and terrorist financing. Accordingly, they need to be equipped with an appropriate system against money laundry. RBA is considered an effective way to combat money laundering and terrorist financing. Financial institutions and designated non-financial bodies and professions (DNFBPs) should take enhanced measures to manage and mitigate higher risks, while simplified measures are permitted for lower risks as long as there is no suspicion of money laundering or terrorist financing. By taking a differentiated approach depending on the level of risks, the system can be implemented and maintained in more effective manner. It is assumed that assessment of risks is carried out with due consideration.
So far, I introduced the new measures under the FATF recommendations. Even though each measure takes a different mode of supervision and regulation, all of them have something in common. You should have recognized it. Right, all these new recommendations for the ends of international financial system free from money laundering which is criminal activity preventing fair and just financial flows. For now, we will see how these new measures are implemented in our real financial system.