Serious issues with Vanuatu’s AML/CFT ratings

VANUATU’S anti-money laundering regime has been upgraded on ‘technical compliance’ ratings.

But the country’s reputation remains tarnished by unchanged ‘effectiveness’ ratings with ‘major flaws’ according to independent research.

The latest re-rating of Vanuatu’s AML/CFT regime, released on September 20, updated 27 of 40 ‘technical compliance’ ratings.

Asia-Pacific money laundering watchdog APG congratulated Vanuatu for ‘significant reforms’ over the past three years, but didn’t upgrade any of the 11 ‘effectiveness’ measures which the Paris-based Financial Action Task Force considers the ‘main component’ of anti-money laundering evaluations.

That means that Vanuatu’s reputation and access to financial markets continues to be affected by its so called ‘effectiveness’ ratings from 2015, which the latest research published in the Journal of Money Laundering Control said doesn’t properly evaluate effectiveness. (Vanuatu was awarded the lowest possible rating in all 11 areas assessed for ‘effectiveness’).

The Paris-based Financial Action Task Force introduced a new ‘effectiveness’ methodology in 2013 because compliance with FATF’s ’40 recommendations’ (previously the sole focus of evaluations since 1990) gave no assurance that money laundering regulations were effective.

An extensive process demanding significant resources and preparation by authorities, evaluations now assess anti-money laundering regimes based on two sets of rules: technical compliance with FATF’s 40 recommendations, and ‘effectiveness’ based on 11 ‘outcome’ measures.

But the new study reveals major flaws with the effectiveness criteria.

Measuring effort, not outcomes according to the study’s author, Dr Ron Pol from international consultancy, ‘misapplication of outcome labels for what are, in truth, simplistic output and activity measures miss an opportunity to evaluate the real impact of anti-money laundering rules’.

He said that FATF’s new methodology doesn’t evaluate outcomes in the sense generally understood as the effect or impact of regulations.

“More meaningful outcome measures, for example, might include the extent to which the system better allows authorities to reduce and prevent crime, and to cut the social and economic harms caused by serious crime like drugs-trafficking, corruption, fraud and tax evasion,” he said.

“Some of those measures are difficult to evaluate but assessing anti-money laundering regimes by superficial ‘easy-to-measure’ metrics suggests that the intensive rating exercise conveys value more as a rhetorical device than any real measure of effectiveness.

“That’s because the current measures largely reflect the efforts of regulatory and enforcement authorities, not whether those efforts have any meaningful impact on serious crime.

“Moreover assessors often use the same evidence to assess both the old and new criteria. But, compressing FATF’s 40 recommendations into an abbreviated yet broadly equivalent list of so-called ‘outcomes’ adds little new evaluative capability beyond 11 more boxes to tick.

“The nature of any tick-box system means that it’s possible for jurisdictions to get high ratings without much impact on crime, and vice versa.

“To their credit, authorities appear often to have focused more on crime prevention than better ratings, although close examination of more than 50 evaluations to date reveal ways to achieve both.

“Nonetheless, although the new ratings system arguably lacks much meaning, low scores have a very real impact on any jurisdiction’s access to financial markets.”

Another academic paper also noted ‘enormous; frustration that, despite nearly 30 years of money laundering obligations (now imposed on millions of firms in nearly 200 countries) the ‘huge and growing cost of compliance has been accompanied by little observable effect’.

Professors Levi, Reuter and Halliday said that the modern anti-money laundering system is ‘highly cost-inefficient’ and has failed ‘to produce credible evidence of [its] effectiveness’.

The new study’s detailed analysis makes similar findings. It concluded that FATF’s new methodology offers few reliable indicators about the effectiveness of money laundering controls.

But the new study ends optimistically.

“FATF’s frank acknowledgement that evaluating for effectiveness was missing, and important, is a positive step”, said Pol.

“Likewise, that outcomes matter. FATF also frequently adjusts its standards and guidance as circumstances change. If it accepts that some principles and practices underpinning its effectiveness framework might be improved, that tradition might reasonably be expected to continue.”