Republic of Maldives: detailed assessment report on anti-money laundering and combating the financing of terrorism

Abstract

This report summarizes the anti-money laundering and counter-terrorist financing measures (AML/CFT) that were in place in the Republic of Maldives at the time of the on-site visit (October 17–28, 2010) and shortly thereafter. It describes and analyzes these measures and offers recommendations on how to strengthen certain aspects of the AML/CFT system. It also assesses the Maldives’ level of compliance with the 40+9 Recommendations of the Financial Action Task Force (FATF) (see the attached table on the Ratings of Compliance with the FATF Recommendations). Key Findings 2. The financial sector of the Maldives, although small and not very developed, is susceptible to both money laundering and, to a lesser extent, terrorist financing. While the authorities do not have estimates of the size of the crime economy, anecdotal evidence suggest that trafficking in illegal drugs and corruption alone produce significant amounts of illegal funds. There are also indications that resources have been raised in the country to fund terrorists and terrorist activities abroad. 3. Over the last years, the Maldives has taken steps to lay down the foundations of an AML/CFT framework. Institutional measures have been taken to set up a financial intelligence unit (FIU), and laws have been passed to criminalize, albeit insufficiently, the laundering of the proceeds of drug-related offenses and impose basic AML/CFT preventive measures on banks. Regulations were adopted to address some AML/CFT aspects in the securities sector. 4. The current AML/CFT framework is very recent and in need of considerable improvements, both in terms of substance and implementation. Domestic inter-agency interaction relies on informal arrangements between the competent authorities rather than on formal arrangements, the criminal legal framework is minimal, and most of the measures for the private sector are issued in the form of guidance rather than mandatory requirements. At the time of the assessment, no enforceable AML/CFT obligations were in place. Shortly thereafter, the authorities passed a new Banking Act which requires banks to implement basic AML/CFT measures such as customer identification and reporting of suspicious transactions to the FIU. Intermediaries in the securities sector are required to implement limited AML/CFT measures which became enforceable in April 2011. Financial institutions other than banks and securities intermediaries, as well as designated businesses and professions (DNFBPs) active in Maldives are not subject to AML/CFT requirements. The authorities are working on a draft AML/CFT law which would impose more comprehensive AML/CFT preventive measures on financial institutions and DNFBPs, strengthen key agencies such as the FIU, and enhance domestic cooperation and coordination. Legal Systems and Related Institutional Measures 5. The Maldives has criminalized money laundering, but only with respect to the proceeds of offenses listed in the Drugs Act. The money laundering offense covers some aspects of the standard but not, for example, the conversion of criminal property and the concealment or disguise of the location, disposition and movement of that property. The authorities believe that, although not mentioned in the law, it is necessary to obtain a conviction for the predicate offense in order to secure money laundering charges. 6. The framework for provisional measures and confiscation suffers from major shortcomings and is rarely used. The types of property that may be confiscated are limited to tangible, corporeal assets with a direct link to the predicate offense, and there is no possibility to confiscate property of corresponding value. 7. The authorities’ action against money laundering is not commensurate to the risk thereof. No investigation has taken place and no charges have been brought for money laundering under the Drugs Act. Drug trafficking is, however, one of the most frequent asset-generating crimes in the Maldives with an increasingly high number of the population using and or trafficking in illegal psychotropic substances. Anecdotal evidence suggests that it may generate up to US$157,000 a day, or US$57 million per year. 8. Activities other than those listed in the Drugs Act do not constitute predicate offenses for money laundering. All of the FATF-designated categories of offenses have been criminalized in the Maldives. However, asset generating crimes other than drug-related offenses such as corruption are not predicate offenses for money laundering and this constitutes a major shortcoming of the current AML/CFT framework. 9. Terrorist financing is not criminalized in a separate and autonomous way. The provision of “finance and property” for the commission of a terrorist act only constitutes an ancillary offense (aiding and abetting) to the commission of that act. The offense is drafted in broad and undefined terms. This would entail that some aspects of the standard are covered (such as the direct and indirect provision of financial support, for example), but it also creates considerable ambiguity in the authorities’ mind as to the precise scope of the offense. No charges have ever been brought before the courts for this offense. 10. There are no laws or procedures in place to freeze terrorist funds or assets of persons in line with United Nations Security Council Resolutions (UNSCR) 1267 and 1373 (and their successor resolutions), and those designated under the freezing mechanisms of other countries. The Maldivian central bank, the Maldives Monetary Authority (MMA), has sent the UNSCR Consolidated list to banks, credit card operators and money transfer businesses with an “instruction” to freeze the account of designated persons and entities, but there is no legal basis (for the MMA or any other authority) to require financial institutions to compare their list of clients with the Consolidated list (or any other list), and, in case of a positive match, to freeze and report the assets. 11. The Maldives suffered one terrorist attack in its capital, the Sultan Park bombing, in September 2007 but reached no clear conclusion as to its funding. The intelligence gathered by Maldivian authorities and by foreign law enforcement agencies (both in respect to this attack and in relation to terrorist activities conducted in other countries) indicated that funds may occasionally be raised in Maldives to support terrorism abroad. There is, however, no information on the amounts involved. 12. Shortcomings in the overall criminal legislative framework, in particular with respect to criminal procedure, and the lack of resources of competent authorities make it challenging for the Maldives to fight effectively against money laundering and terrorist financing. The criminal process is slow and fraught with legal uncertainty mainly due to the paucity of criminal procedure rules. In addition, the AML/CFT system is strained by a lack of capacity in the Maldives Police Service (MPS), the Prosecutor General’s Office (PGO), and the judiciary. 13. The authorities set up an FIU within the central bank on the basis of a 2004 interministerial agreement. The FIU did not become operational until 2006, when the MMA issued an “AML/CFT” Circular to all banks and other money transfer businesses instructing them to report suspicious transactions to the FIU. Despite its title, the Circular only address AML. Absent a legal basis for the MMA to impose AML/CFT obligations, the Circular is not mandatory and not enforceable, but two banks and two money remitters nevertheless filed suspicious transactions reports (STRs) with the FIU in 2009. All four reports were analyzed by the FIU; two were closed because they contained no suspicious elements, one was forwarded to the MPS for further investigation, and one is still with the FIU. 14. The FIU lacks operational independence and has not been granted the necessary powers to conduct its functions in an effective manner. The FIU is the national center for the receipt and analysis of STRs filed by banks, but does not have the authority to disseminate financial intelligence; only the MMA has this authority. The analysis function is limited notably because the FIU has not been afforded access to all relevant information. While so far all the FIU’s requests for information from other agencies have been complied with, there is no legal basis for these agencies to provide the requested information. The FIU does not have the authority to receive, analyze and disseminate STRs from entities other than banks. Since it became operational, the FIU has spear headed the country’s AML/CFT efforts and created a useful (although informal) network of contacts with other key authorities. Preventive Measures—Financial Institutions 15. Banks and intermediaries in the securities sector are the only entities in the Maldives required to implement AML/CFT measures: Mandatory measures for banks were introduced in December 2010 (i.e. less than 8 weeks after the end of the assessment) with the enactment of the Banking Act; The Capital Market Development Authority (CMDA) 2010 Regulation on Anti-Money Laundering in Securities-Related Transactions (the CMDA 2010 Regulation) requires CMDA licensees to apply a number of AML/CFT measures, but, because the Regulation does not constitute primary or secondary legislation, it does not fully conform with the FATF standard. 16. The 2010 Banking Act sets out CDD and record keeping obligations for banks, as well as a requirement to report suspicious transactions to the FIU. Until December 2010, the only text that addressed AML measures was a 2006 MMA Circular to banks and other institutions involved in money transfer activities which provides general information on money laundering and lists some preventive measures that should be implemented. The Circular is, however, neither mandatory nor enforceable and thus falls short of the standard. 17. While the issuance of the 2010 Banking Act is a very positive step in establishing a mandatory framework for AML/CFT preventive measures, the Act should be enhanced in order to be in line with the standard: The identification requirements in particular need to be strengthened (notably with respect to the identification of beneficial owners and the verification of the identity of all customers), and record keeping requirements should be more specific. Internal control requirements are very broad and are yet to be elaborated in regulation. Furthermore, the Banking Act is silent on a number of additional measures that banks should be required to undertake. There are, in particular, no obligations: to apply enhanced due diligence with respect to customers or beneficial owners who are politically-exposed persons; to pay special attention to complex, unusual large or unusual patterns of transactions; to apply correspondent banking relationships and wire transfer rules in line with the standard. 18. AML/CFT measures for intermediaries in the securities sector were issued in 2010 and only became enforceable in April 2011 (i.e. more than 8 weeks after the assessment), but their legal basis is, in many instances, insufficient to be in compliance with the standard. The CMDA 2010 AML Regulations set out some (albeit basic) customer identification requirements and requires licensees to exercise special due diligence to extraordinary complex and large transactions that do not have a clear investment purpose, or that appear otherwise suspicious. It does not, however, require licensees to report suspicious transactions to the FIU. Moreover, record keeping and internal control requirements are too broad to be effective. Overall, considering that the CMDA Regulation is neither primary nor secondary legislation, it is insufficient to meet many of the requirements of the standard. 19. At the time of the assessment, monitoring and supervision of the banks’ and securities intermediaries’ compliance with AML/CFT requirements had not formally begun. The MMA and the CMDA, which are responsible for supervision of financial institutions in the banking and securities industries respectively, have been granted a range of powers to fulfill their functions, but have not started using them for AML/CFT purposes. This is due, in the banking sector, to the recent enactment of the Banking Act and, in the securities sector, to the fact that the CMDA Regulation provided the CMDA licensees with a 6 month timeframe (i.e. until April 2011) to comply with its provisions. It is nevertheless worth mentioning that the MMA did, in the course of prudential supervision, conduct some form of monitoring of banks’ compliance with the 2006 AML Circular (although it was not mandatory) and suggested ways to improve the banks’ nascent AML/CFT systems. 20. Financial institutions other than banks and intermediaries in the securities sector are not subject to AML/CFT obligations. Insurance companies and intermediaries, finance companies, money remittance services providers, foreign exchange businesses and credit card companies therefore operate outside the AML/CFT framework. The authorities are planning on including some, if not all, of these institutions in their draft AML/CFT legislation. Preventive Measures—Designated Non-Financial Businesses and Professions 21. Designated non-financial businesses and professions (DNFBPs) are not subject to AML/CFT obligations and to supervision of any kind. DNFBPs active in Maldives are lawyers, accountants and dealers in precious metals and stones. Casinos are outlawed under the Constitution and Shari’ah. The buying and selling of real estate is conducted by the seller and buyer themselves, or by lawyers. The latter also act as notaries and provide company formation activities and other companies services. Trusts cannot be established under current Maldivian law, but a draft Trust Law was prepared in 2008. According to the authorities, there is at the moment no trust business in Maldives, and no services to trusts formed in other jurisdictions, but the website of some Malé based law firms suggests otherwise. The draft AML/CFT legislation currently being prepared imposes AML/CFT obligations, including reporting of suspicious transactions requirements, on DNFBPs active in the Maldives. Legal Persons and Arrangements & Non-Profit Organizations 22. The current framework does not ensure sufficient transparency of legal persons nor timely access to beneficial ownership and control information. Legal entities may take the form of a company, partnership, cooperative society or non-profit association. According the authorities’ latest figures, there 8,657 legal entities in the Maldives most of which are companies. The Ministry of Economic Development holds some information on registered legal entities, but this information is neither comprehensive nor updated in a consistent manner, and, in the absence of an electronic database, is not readily accessible. 23. The Maldives has a system of registration in place for NPOs but the information maintained by the registrar is insufficient to ensure sufficient transparency of NPOs. Information available at the registrar is limited to that pertaining to the purposes and objectives of registered NPOs, and the identity of their executive committees. There is no active or adequate system to promote effective supervision and monitoring of the NPOs, and no true understanding of risks of terrorist financing in the sector. The authorities suspect that NPOs have been misused to provide funding to terrorists aboard, but their suspicions remain unsubstantiated and no charges were ever brought before the courts. There is no coordinated national strategy to aim at protecting NPOs from abuse for terrorist financing. The authorities are conducting a “scoping exercise” within the NPO sector, which will notably result in a redrafting of the Association Act, but the extent to which it will also look into the NPOs’ vulnerability to terrorist financing risks is unclear. National and International Co-operation 24. A domestic cooperation mechanism specifically dedicated to AML/CFT issues has been set up. A Coordination Committee for Combating Money Laundering and Terrorist Financing was created under the lead of the FIU and brings together representatives from the majority of the relevant authorities (including prosecutors, police, MMA, CMDA). It has not however delivered tangible results at this stage, with the exception of the responses to the detailed assessment questionnaire. 25. There is no legislative framework regulating mutual legal assistance and extradition. The types and range of measures that the Maldivian authorities may take on behalf of another State are mainly defined in memorandums of understanding concluded with other jurisdictions (copies of which were not provided to the assessment team). According to the authorities, very few requests for assistance have been addressed to the Maldives. Informal assistance however is more frequent. Other Issues 26. Overall, the staff of the relevant Maldivian authorities should be increased and provided with training to increase AML/CFT expertise. The FIU has raised awareness on AML/CFT issues amongst the key agencies but there is a need for further AML/CFT training, in particular for the purposes of AML/CFT investigations and supervision.

27. It is important that key pieces of legislation be passed. In addition to comprehensive AML/CFT legislation, the draft revised Penal Code should be adopted and criminal procedure rules should be set out in law in order to enable the authorities to fight against money laundering and terrorist financing in an effective way.