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Siege on Money Laundering. What is the Power of Law?

Siege on Money Laundering. What is the Power of Law?

There is a lot of money produced in criminal activities in the legal circuit of the global economy. In Mozambique, authorities estimate the movement of more than 35 billion meticais in about 2300 suspicious operations detected by national financial institutions in 2021. But the numbers could be much higher, given the weak enforcement capacity that makes Mozambique one of the most vulnerable countries in this regard. The immediate consequence of this is international sanctions that could result in a drop in competitiveness of the economy and delays in the development of the financial system. To correct the context, a law and a strategy have just been approved, but much remains to be done.

As never before, an issue as old as it is worrying, money laundering and financing of terrorism, is back on the agenda, due to the threat of sanctions that should arise from the non-compliance with internationally established combat norms, which are not being duly complied with in the country.

The phenomenon extends mainly to duly identified sectors, namely banking and insurance, bureaux de change, casinos, real estate and transactions of precious stones and metals. In a recent study on the subject, the Centre for Public Integrity (CIP) revealed that the country had “failed” to comply with 80 per cent of the international recommendations on money laundering and the financing of terrorism made by the Financial Action Task Force (GAFI) – an international college of regulators, created in 1989 by the group of the world’s richest countries, the G7. The same study clarified that by May 2022, “only eight of the 40 recommendations have been met, representing only 20 per cent of the requirements.” According to the CIP, this could result in sanctions such as restrictions to creditors in accessing the global financial system, a delay in financial transactions originating in the country.

In this sense, between 17 and 21 October 2022, Mozambique was subject to the assessment of the FATF, in an annual conference held in Paris and, in view of this level of non-compliance, the country even ended up entering the “grey list” (the stage before the worst) of this entity. What was until now a threat has become a reality.

However, it is not the problem itself that we want to focus the reader’s attention on, but rather the discussion of the effectiveness of the solutions adopted to solve it, namely the new Law against Money Laundering and Terrorist Financing, as well as the recently approved strategy with the same purpose, which should be in force between 2023 and 2024. E&M heard from two entities specialised in the subject to unveil the scope of the regulatory changes that will support the country to strengthen its fight against this phenomenon.

For what and why has the Law been revised?

Malik Amirali, executive director of EY and specialist in financial matters, helps us understand the transformations that the market has undergone over time, until it gave rise to the need for a more demanding legal protection and that today is adopted through the replacement of the 2013 Law by the current one – Law No. 11/2022.

According to the official, what gave rise to the new Money Laundering and Terrorist Financing Law were three fundamental components, all driven by the pressure on the country. “The first has to do with the requirements of the United Nations Security Council, of which Mozambique is a non-permanent member since June this year. Secondly, the obligations issued by the FATF, which is the college of regulators that, in June 2021, published the 40 recommendations to strengthen actions to combat money laundering. Finally, in third place, the experience component of the internal regulator, the Mozambique Financial Intelligence Office (GIFiM), which is carrying out many supervisory actions, raising awareness of monitoring. Playing its role, GIFiM has seen that there are many gaps that need to be closed and that a new law would be the best way to do that.”

But, more than a law, and based on the experience that this alone does not guarantee the achievement of its objectives, the focus of the new instrument places great emphasis on risk assessment, encompassing three components: macro, micro and supervision.

Regarding the macro component, the law states that it is necessary to make a risk assessment at the national level and that it is the responsibility of GIFiM. It is necessary to make the risk assessment at the sectoral level, which is up to the supervisor of each sector. As for the micro component, the law states that each financial institution has to assess the risk of each client.

In the supervision chapter, the law foresees that regulators will analyse the risk profile of each entity and group, and then make a report to be submitted to supervision. In other words, if they detect a group that presents a high risk of money laundering, they will have to visit that group with greater frequency and intensity.

What has changed with the new law?

More than the fight itself, the emphasis of the new legislation focuses on prevention and this is realised through three main points: the first difference, compared to the 2013 law, is the tightening of existing rules in areas identified as vulnerable and the expansion of the scope of the law to fill new areas. The second difference is the approach focused on the risk that already existed but was not being considered. And this approach comprises macro, micro and supervisory dimensions. The third difference is that, if before we were talking about the fight against money laundering and the financing of terrorism, in the new legal framework there was the inclusion of a new component, which is the fight against the financing of weapons of mass destruction.

E&M also heard from Tiago Arouca Mendes, managing partner of MDR Advogados, who highlights the strong points of the new regime, starting by mentioning “the widening and requalification of the range of obliged entities, which seems more adjusted to the reality of the entities most exposed to these crimes and other related crimes, simultaneously allowing for greater extension and cohesion in the application of the rules against money laundering”.

It then refers to the introduction of specific measures related to Politically Exposed Persons and beneficial owners, such as a specific regime for virtual asset providers (e.g. cryptocurrencies), with solutions aimed at combating new threats of integrating amounts of illicit origin into the financial system through means linked to technological innovation. Advances in relation to the 2013 legislation also include, in the new regime, and according to MDR Advogados, the first specific provisions applicable to trusts and other collective interest centres without legal personality of a similar nature, whose beneficiaries are defined according to specific characteristics or categories.

Finally, and “in an innovative way”, law no. 11/2022 determines that financial institutions and non-financial entities must ensure the application of Mozambican laws, regulations and provisions, to the extent permitted by the law of the foreign country, whenever the minimum requirements applicable to the prevention and fight against money laundering, financing of terrorism and financing of the proliferation of weapons of mass destruction in the foreign country prove to be less stringent than the Mozambican ones.

Casinos are potential targets for criminals to hide the origin of illicit wealth


Why overlay a strategy on the law?

Although the law itself represents an important advance, the Council of Ministers recently approved the Strategy to Combat Money Laundering and Terrorist Financing 2023-2024. This instrument will be in force in parallel with the law that has the same objective. Why?

Malik Amirali, executive director of Ernst & Young, explains that the reason “is very much linked to Mozambique’s poor performance over time, which always shows little progress in the indicators assessed by the FATF. Such a situation imposes, he continues, “additional pressure these days.” A trip back in time helps to better understand the genesis of this pressure. The FATF was in the country in 2009 and, two years later, issued a performance report that, naturally, was not favourable. The authorities reacted with the approval of the 2013 law. In late 2019, the FATF returned to Mozambique for the same purpose and did not issue the report (equally unfavourable) until June 2021 due to the covid-19 pandemic. The response, once again, was the approval of the new law. This leads to the conclusion that the 2023-2024 strategy, now approved by the Council of Ministers, is very much linked to the conclusions of that report. It is because in that document all components of performance were analysed, from legislation, the financial sector and all others linked to the risk of money laundering, including the involvement of the Government and all entities that have the power to act. “This is what gave rise to the strategy, which aims to prevent the financial system and the country from being used as a channel for money laundering, which has serious reputational consequences,” explains EY’s CEO.

Having a good law is not enough…

Tiago Arouca Mendes recognises this fact and lists several elements that will enable the materialisation of what is foreseen in the new law. He begins by explaining that it is necessary that the regulation of law no. 11/2022 – which must be approved within 180 days of its entry into force – “be robust and adequate, and approved in a timely manner, so as not to render the provisions of the new law ineffective.” Also on this topic, the guidelines to be approved by the competent authorities will also help determine the implementation march of the new law.

“I note that the guidelines and guidelines for preventing and combating money laundering, financing of terrorism and financing of the proliferation of weapons of mass destruction (BC/FT/FP) in the real estate sector have already been approved, through the order of 27/09/2022,” he exemplifies, with satisfaction. Another aspect that could be determinant for the effectiveness of the new regime is risk assessments. In this new legal framework, the national risk assessment and sectoral risk assessments are of particular importance, as are the assessments to be developed by financial institutions and non-financial entities in relation to the risks of money laundering, financing of terrorism and financing of the proliferation of weapons of mass destruction to which they are exposed at the customer, transaction and institution level.

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Also in this scope, there is an innovative aspect that relates to risk management in the use of new technologies: obliged entities must identify and assess the risks that may arise from the offer of products and services or operations that may favour anonymity, the development of new products, services, distribution mechanisms, payment methods and new commercial practices and the use of new or developing technologies, both for new and existing products and services.

Finally, “a critical factor is the collaboration and interconnection of all competent authorities and entities involved.” As an example, information on beneficial owners is recorded by the competent entity for the registration of legal entities. In other words, an implemented and properly updated platform will be necessary, allowing open channels of communication between the competent entities in order to ensure both the fulfilment of all obligations by the obliged entities and the control and supervision by the competent authorities”, clarifies the managing partner of MDR Advogados.

Malik Amirali, in turn, says that “the regulator has increased and tightened the rules. In other words, it is doing its part to make the system more secure. It is up to the banks and insurers to ensure compliance. For this, regulators in both areas (banking and insurance) will have to supervise with greater intensity and frequency to know if these entities are complying, where they are having difficulties and why.”

BoM has been relentless in overseeing financial institutions, but for the FATF, the system’s shortcomings lie in the delay in creating regulations that prevent risks

Pressure on banks

The Bank of Mozambique is attentive to the “duty to identify and verify customers” and the “continuous surveillance of business relationships”, provided for in the Law Against Money Laundering and Terrorist Financing. It occurs that banks have often been sanctioned for irregularities at this level.

In 2019, 2021 and 2022, several institutions have been sanctioned, ranging from commercial banks (including the largest in the market) to microfinance operators to financial companies.

E&M tried to hear from the Mozambican Association of Banks (AMB), but until the close of this edition the organisation had not commented. But EY helps to understand what is happening at the level of these institutions. “Many banks do not have the internal capacity to comply with all the rules and, on the other hand, there is the issue that goes beyond banking, and not all countries have systems that allow them to identify the type of transactions that need to be controlled.”

Most large banks have the systems that are more than 20 years old, but the world continues to evolve and, given the difficulty in identifying where to start, many of these banks focus on the basics, which is on the onboarding and monitoring part. However, there are several other stages of the customer lifecycle that one needs to monitor to understand changes in their risk profile,” explains Malik Amirali.

What the BoM demands today is exactly what it should demand: compliance with the law. But money laundering is dynamic and requires clarity of processes, dynamic control systems and staff prepared to deal with it. Upstream, the financial system ends up complying with the rules that exist and, at that level, as the FATF confirmed on 21 October, there is a huge delay in creating legal regulations that make the system more transparent and aligned with international best practices. At that level, the main losers are the banks themselves and the entire national economy.

E&M

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