FIU emasculated for unspecified reasons?
— Sushil KC Khushiram
In his reply to a PNQ of the Leader of the Opposition on 23 April 2013, the minister of finance is reported to have stated the following: “I wish to bring to the attention of the House that in September 2003, changes were brought to the FIAML (Financial Intelligence and Money Laundering) Act to emasculate the FIU (Financial Intelligence Unit) for unspecified reasons.“
The Minister referred to the amendments to Section 10(2) of the FIAML Act which removed the responsibility of supervision and enforcement of compliance by banks and other financial institutions from the functions of the FIU, and limited its powers to issue guidelines to the reporting requirements of suspicious transaction reports (STRs). He also inferred that the reporting culture of banks has deteriorated since these amendments.
The Minister has been grossly ill-advised and misguided in making these statements. The reasons for the FIAML Sec 10 amendments were fully explained in Parliament on 19 August 2003 during the second reading of the Anti-Money Laundering (Miscellaneous Provisions) Bill, as follows: “The role of the FIU is being recast to allow it to focus on intelligence gathering and analysis, and dissemination of information to investigatory and supervisory authorities as well as to overseas FIUs and comparable bodies. The FIU will no longer have powers to issue any AML/CFT codes and guidelines or to supervise and enforce compliance under the relevant enactments. These duties and responsibilities are better attributable to the domain of the supervisory authorities for a more efficient regulation of AML/CFT practices.“
The amendment to clarify the functions of the FIU was made on the strength of expert recommendations of a joint IMF/World Bank Financial Sector Assessment, and a Review of Standards and Codes on Anti Money Laundering (AML/CFT), conducted in Mauritius at end 2002. The recommendations included amendments to the FIAML Act to address certain identified weaknesses and deficiencies, and to better align our AML/CFT regime with internationally recognized FATF standards.
A Recommended Action was: “The FIAML Act should be amended further in order to ensure that the FIU’s role is clarified with respect of its domestic and international functions… At the domestic level, the FIU should focus its activity on the receiving, analysis, and dissemination of STRs, and let to other Mauritian authorities, such as the BOM and the FSC, the compliance monitoring function.”
There was a general consensus that the FIU should not be burdened with an enforcement function to allow it to focus on its main responsibility of intelligence collection, analysis and dissemination, especially as the BOM (Bank of Mauritius) and the FSC (Financial Services Commission) were making rapid progress in issuing Codes and Guidance Notes and other reinforcing AML/CFT measures. New banking legislation, then under preparation, would also spell out clearly the AML/CFT supervision and enforcement framework for banks.
Amendments made by the Minister in 2012 to the FIAML Act, Sec 18 (3A), were exactly in the same vein as in 2003, by entrusting the supervision and enforcement of AML/CFT compliance of members of a relevant profession or occupation to their respective regulatory bodies, e.g., licensed auditors to the Financial Reporting Council.
To say that the FIAML amendments were made for unspecified reasons requires quite a leap of imagination, if not an imaginary leap. Whether these amendments emasculated the FIU is at least arguable, if one does not agree with the reasons for amending the FIAML Act.
In fact, the FIU was strengthened not only by sharpening its focus, but by concurrent amendments to (i) replace the FIU Review Committee by a Board so as to facilitate the expeditious processing of information and decision making within the FIU, (ii) override banking confidentiality provisions so that banks are not hampered in reporting STRs to the FIU, (iii) give powers to the FIU to request additional information in relation to the STRs, (iv) ease the sharing of information from supervisory authorities to the FIU, (v) help the passing of information from the FIU to overseas FIUs on terms of confidentiality, and (vi) enhance co-ordination between the FIU and other relevant agencies, and concertation on overall AML/CFT strategy and policy, by the setting up of a National AML/CF Committee. If these amendments represent an emasculation of the FIU, let us have some more.
When public indignation is running high, there is always a strong and natural temptation by the authorities to deflect attention from the true nature of a crisis, for instance, by attributing the causes to deficient legislation. Illusory regulatory gaps or allegedly improper legal amendments are tactical expedients to get out of the spotlight.
The recent financial scams have their origin in a financial crime, namely that financial services activities, whether deposit-taking or investment, were being carried out without a licence, which is an offence under banking and other financial services legislation. The BOM and FSC have the primary responsibility to tackle this financial crime. The appropriate response by the BOM and the FSC is to report the offence to the police and collaborate with them and the DPP for charging the offenders and discontinuing these unlicensed activities. The FSC can additionally make inquiries and investigations of those “who ought to be licensed”, as provided for in its governing legislation, and seek Court orders to take corrective legal action against the identified offenders.
There is strictly no need to invoke AML/CFT legislation to address the financial activities conducted by illegal operators, let alone blame amendments to the FIAML Act. A sound application of existing legislation by the financial regulators would suffice. That no effective and conclusive action was taken by the BOM and the FSC, despite public knowledge of illegal money raising activities, and prominent billboard advertisements, raises serious concerns about the adequate enforcement of financial legislation. The frustration expressed by the BOM following its belated police report is not surprising, considering that a number of police officers were purported agents of these fraudulent schemes.
What, then, is the relevance of AML/CFT legislation and of the FIU in this context? The FIU becomes directly involved when it receives a suspicious report about the transactions of the unlicensed entities through banks, other financial institutions, cash dealers and other persons. It analyzes these information disclosures, and disseminates them to the Police, Customs, and ICAC, for investigation and prosecution, as well as to the BOM and FSC. It can request additional information from the reporting bank and other banks, to be further disseminated.
Although a few overseas FIUs do enjoy direct law enforcement powers and may be housed within a financial supervisory body, Government, or the DPP’s office, Mauritius has from the start opted for an independent administrative model, whereby the FIU acts as a buffer between the financial sector and law enforcement agencies.
The FIU thus assists in identifying criminal activities and the perpetrators through the use of the proceeds of their crimes. To do so, the FIU has to rely on financial institutions to shoulder their responsibility to report on suspicious transactions related to the activities of the unlicensed entities, as well as on its analytical and intelligence-gathering abilities. The BOM and FSC are entrusted as financial regulators to ensure AML/CFT compliance by banks and other financial institutions.
Banks failed to report in a timely and significant manner, and the few STRs communicated by banks to the FIU did not result in expeditious legal action, which raises legitimate concerns about the supervision and enforcement of AML/CFT legislation, and the operational effectiveness of the institutional AML/CFT framework, including the National AML/CFT Committee.
Mauritius excels in adopting legislation that complies to the highest and latest international standards, and in setting up the finest institutions, but lags in the effective enforcement of legislation and the proper functioning of institutions. There are grounds to believe that there are major risks still looming in the financial sector. To counter the future recurrence of financial fraud and deception, greater focus should be placed on enhancing regulatory compliance under existing financial legislation, including the AML/CFT regime, and by strengthening the performance of all the bodies and agencies concerned.
Bringing up the 2003 FIAMLA amendments is a red herring which can only serve to emasculate a constructive discussion of financial governance issues.
Sushil KC Khushiram