The Financial Action Task Force (FATF), to protect the international financial system from Money Laundering and Financing of Terrorism (ML/FT) risks and to encourage greater compliance with the AML/CFT (Anti Money Laundering/Combating Financing of Terrorism) standards, identifies jurisdictions that have strategic deficiencies and works with them to address those deficiencies that pose a risk to the international financial system.
There are around 50 jurisdictions with weak measures to combat money laundering and terrorist financing. Account holders who are tax-resident in countries having strategic deficiencies in adopting FATF recommendations, usually face challenges in remitting funds to their home country, as the banks situated in these countries may not be having correspondent banks which follow FATF recommendations strictly.
Commercial banks are required to apply enhanced due diligence on account holders (tax) residing in black & grey listed countries under FATF regulations.
Normally, Financial Institutions (FIs) use dedicated external applications to detect remittances which are suspicious in nature or those that flow from countries in the blacklist. But the FIs in blacklisted countries may be utilizing the services of more than one correspondent bank to complete the money transfer due to which the bank in the recipient country may not be able to trace the source of funds or establish the trail of movement of funds. Many of the external/dedicated applications used by banks are not equipped to handle funds transfer that hit the accounts through circuitous routes/correspondents. (E.g.: A funds transfer [in USD] effected from a black/grey listed country may be routed through a correspondent not necessarily located in the USA.) The risk is further accentuated when a bank classifies non-resident account holders as “low risk” if the on-boarding is completed through personal verification by a bank employee. Thus a non-resident customer residing in a black/grey listed country may get classified as “low risk”, when in fact, he/should have been classified as “high risk”.
Under FATCA-CRS regulations, Reporting FIs (mainly commercial banks) are required to verify/record the (tax) residency and nationality details of the account holder and report the details of accounts of such account holders to the respective nodal authority. Commercial banks have started doing this exercise on an annual basis and banks which have tighter Risk Management Policies carry out the exercise of identifying/remediating reportable account holders at frequent intervals. During such exercise, banks can short-list account holders (tax) residing in black/grey listed countries and complete documentation through close follow up. While following up, banks can scrutinize the operations in the accounts of such customers residing in black/grey listed countries, to ensure the flow of funds through proper channels only. In certain cases, the account holder residing in a black-listed country might have moved out, which gets revealed during the follow-up exercise. Further, an account holder residing in such countries may be counseled to have his/her bank accounts with those banks only which comply with FATF Recommendations.
In certain countries (like India), the Regulators require the commercial banks to give special attention to business relationships and transactions with persons from countries that do not or insufficiently apply the FATF Recommendations. Thus a proper follow-up and upkeep of documents under FATCA-CRS regulations will help the commercial banks to follow the AML/CFT guidelines with ease and overcome deficiencies if any in the external applications used for tracking the transactions/account holders residing in countries classified as black/grey by FATF.