Anti Money Laundering Efforts
Ujwal Raj Gautam
In the Banks and Financial Institutions (BFIs), financial criminals can participate in any transaction that attempts to disguise their illicit source of funds derived from illegal activities such as, fraud, corruption, tax evasion, organised crime, etc. Such crimes are the subject of Money Laundering (ML). Likewise, criminals can be involved in any activity that provides funding or financial support to any kind to the terrorist activities. The funds involved may have been raised from the legitimate sources as well as from criminal sources. Such activities are the subject of Terrorist Financing (TF).
ML is, therefore, a process of illegally converting black or dirty money into “white” or legal money. Such money does not have legal sources. ML is generally carried out in three steps: placement, layering and integration. First, the illegal wealth is deposited in shell companies, banks or casinos. The second stage is concentrated on separating the proceeds from criminal activity through the use of various layers of monetary transactions. Then, finally, the laundered money is brought back into the mainstream financial system by paying taxes to legitimise wages, thus giving the money a “legal” source. Across the world, a huge amount of money obtained through terrorist financing, drug and human trafficking is laundered annually.
Since the very first stage of money laundering, placement, occurs at banks and financial institutions, it is vital for such institutions to be extra vigilant while performing financial transactions. It is especially so in Nepal as our financial system is still predominantly ruled by cash-based transactions or transactions emanating from non-account holders (third party). A perfect smart (digital) banking is still lacking though the country is attempting cashless transactions in the financial system. This sort of banking transaction might create ML and TF risk, inviting systemic risk.
Nepal was regarded as an easy place for money laundered because of absence of the economic stability, lack of comprehensive and long run vision and guidelines, weak interrogative system, lack of well-trained bureaucracy and open boarder and huge informal transaction with India. Taking these facts into account, Financial Action Task Force (FATF), a global governing body against ML and TF, put Nepal under watch list. An assessment by Asia Pacific Group (APG) on Money Laundering, an associate member of FATF, in 2005 had found significant deficiencies in Nepal’s legislation and anti-money laundering infrastructure. Nepal did not fully complete any of the 49 standards set by FATF, raising doubts over Nepal’s ability to control financing to criminal activities.
For fear of being blacklisted, Nepali parliament ultimately passed Money (Assets) Laundering Prevention Act in 2008 (Amended later on in 2014) that carries various provisions relating to anti-money laundering such as: Not to open fictitious accounts, identification of politically exposed persons (PEPs) and beneficial owner (BO), not to establish shell banks, customer identification, risk assessment and due diligence, transaction monitoring, wire transfer (identification of originator and beneficiary), reporting suspicious and high value transaction, , formation of Financial Information Unit (FIU) and coordination committee, roles and responsibilities of AML department, provisions relating to investigation and punishment and national risk assessment. Besides, guided by APG instructions, the government of Nepal issued so many Acts interrelated with AML as Mutually Legal Assistance Act 2014, Organised Crime Act 2014, Extradition Act 2014 and Assets Control & Confiscation Act 2014.
The Nepal Rastra Bank (NRB), the regulatory body of BFIs, has a formal and executive order intended to guide, govern and influence the BFIs to work in a directed manner. The NRB Unified Directives, which was amended in 2018 of late, also carries some Clauses in chapter 19 against the ML and TF based on AML act 2014 and rules 2016. The major contents of this directive to be mandatorily carried out by BFIs to check ML and TF risk are: to make policy and procedure, to identify and verify the customers, provisions relating to PEPs and BOs, provisions relating to SCDD and ECDD, provisions relating to wire transfer and correspondent banking relation, threshold and suspicious transaction, internal control and record keeping and action and punishment etc.
This directive has been enforced to the banking sector that doesn’t cover huge financial transactions happening from cooperatives. There are about 14,000 Saving & Credit Cooperatives that hold about 10 per cent of total financial transaction in Nepali economy. In view of the transparency and corporate governance in relation to the money laundering and terrorist financing, the NRB, in association with the ministry of cooperative and poverty alleviation, has recently promulgated a Directive, 2074 to have AML regime over mushroomingly grown number of cooperatives in Nepal. It is one step ahead in development of AML attempts in Nepal.
In the meantime, the United Nations Office on Drugs and Crime (UNODC) launched a standard software system (often called ‘goAML’) available for Financial Intelligence Units to counter terrorist financing and money laundering all over the globe. The goAML software is a part of UNODC’s strategic response to crime, particularly serious and organised crime. The NRB has enforced the banks to apply this software and regularly report on threshold and suspicious activities of transaction. Nepali BFIs are working ‘do or die’ to report on goAML from the deadline that starts from 18 October 2018. However, the problem is that our financial system is still predominantly ruled by cash-based transactions or transactions emanating from non-account holders (third party). The Core Banking Software (CBS) of almost BFIs lack the description about the conductor of transactions other than the account holders themselves. This might distort the target to reach the real money launderer. This sort of banking transaction might foster ML and TF risk inviting systemic risk.
Money-laundering and the financing of terrorism are global problems that threaten the security and stability of financial institutions and also undermine economic prosperity. A lot is being done in order to combat money laundering at the global level. Although Nepal has been currently stronger with legal and structural framework against money laundering and terrorist financing, some acute challenges still prevail in its economic structure.
Nepali economy largely suffers from shadow or informal economic transactions that happen through ‘Hundi’, ‘Dhukuti’ and other informal debt and money transfer market. Such transactions could not be locked up in the formal channel. Moreover, formal channels such as banks also lack a perfect technology, including sound data base, MIS and integrated software solutions against ML and TF. Likewise, the open boarder with India and unlimited informal transaction with India in Indian currency are the hurdles to implement AML perfectly. To get updated with AML, Nepal has issued so many Acts and Regulations. However, the degree of punishment is very low in the laws.
Another major challenge with AML in Nepal is offshore transaction and its political protection. Panama Papers and Paradise papers which are like the watchdog against ML activities around the globe have disclosed the Nepali money launderer involved in trafficking money from so called tax heaven nations as such British Virgin Iceland, Cyprus and Egypt. These launderers are walking as freelancer under the political protection. The government could not dare to investigate the financial crime and expose them. Besides, lack of inter-departmental coordination has also been a root cause behind the rise in ML and TF in Nepal. Many bodies are created to handle money laundering. The authorities concerned are ML department, Financial Information Unit (FIU) and Central Bureau of Investigation (CIB). They need to work in a coordinated manner. Because of red tapism and ‘unfaithful judiciary’, an integrated accomplishment of ML related job could not be found so far.