The Cyprus Bar Association (CBA) has issued guidance on identifying, assessing and understanding the risk of terrorist financing (TF) in financial centres (FCs), the contents of which have been reviewed and endorsed by MONEYVAL.
As part of the activities of the MONEYVAL Committee of Experts, representatives from a number of FCs, together with international TF experts, took part in a two-day workshop in Monaco in April 2018, addressing the challenges involved in identifying, assessing and understanding TF risks in FCs and the best practices to combat such risks (the workshop). The CBA published the conclusions of this workshop in the form of official guidance and urged regulated members to consider and implement its contents in their TF risk assessment procedures.
The CBA emphasised that the process of identifying, assessing and understanding the risk of collection, movement and use of funds for TF purposes should primarily involve an evaluation of demographic and geographical factors of the FC in question. The focal point of the assessment however must be the examination of the potential of TF exposure through:
- high levels of cross border business;
- particularly complex structures involving legal persons or legal arrangements;
- service provision from businesses in the FCs to parties supporting foreign terrorism;
- abuse of philanthropy; or
- the use of funds generated by illicit activities to finance terrorism.
Assessment of threat
The CBA highlighted the need for consideration of the crossover between threat and vulnerability when assessing TF risks.
In determining the underlying threat, regulated members are encouraged to observe the extent of any connection between the FC and jurisdictions which present a higher risk of terrorism or have strong links with such countries (focus jurisdictions). Regulated members are urged to take into account the following categories of information, amongst other, as relevant to this consideration:
- data on flows to and from the FC by jurisdiction;
- the extent to which beneficial owners (BOs), relatives of BOs, people exercising control over legal persons or legal arrangements, people with links to such legal persons or legal arrangements are from focus or high risk jurisdictions or link with such jurisdictions;
- the extent to which assets held by and activities undertaken by legal persons and legal arrangements are located in focus jurisdictions or linked to such jurisdictions;
- the extent to which business relationships and one-off transactions are carried out with parties who are in or are linked to focus jurisdictions; and
- the extent to which the FC is used by foreign politically exposed persons.
In determining the levels of TF threat, regulated members are further urged to have regard to the extent to which TF is occurring in jurisdictions with which the FC has close geographical and/ or political links, through:
- internet research;
- reviews of the evaluation reports and risk assessments of such jurisdictions; or
- meetings with relevant authorities.
Assessment of vulnerability
Regulated members are also prompted to examine the extent to which the relevant services or products are likely to be appealing for TF purposes, through observing external sources of information, for instance:
- information of TF patterns provided at authoritative events such as MONEYVAL presentations; or
- evaluation reports and risk assessments of jurisdictions dealing with similar services, products or customer profiles.
The vulnerability assessment should further consist of an evaluation of the measures in place to address TF in the FC and in particular, members are asked to consider a variety of factors including but not limited to:
- any gaps in the preventive legal framework;
- the extent to which the authorities have a good understanding of TF;
- whether there is sufficient skill to investigate TF and supervise compliance with TF requirements;
- whether the operation of formalised arrangements with other jurisdictions is effective; and
- the findings of competent authorities in respect of implementation of international sanctions.
The conclusions of the workshop have been issued in the form of guidance for participating jurisdictions to refer to, which is to be made widely available in order to assist other jurisdictions facing similar challenges in furtherance to the global movement against TF.
It is clearly of paramount importance for law firms to establish robust risk assessment procedures and compliance policies in order to mitigate any significant TF risks which firms are directly exposed to on an everyday basis.
The CBA guidance can be found here.
Harneys has significant experience in advising and assisting firms in Cyprus and elsewhere with establishing suitable compliance infrastructure for the operational needs of businesses. If you have any questions, please contact Marina Stavrou or your usual Harneys contact.