Cooperation between Prudential and AML/CFt supervision

BOX 3.2 (continued)

● Examination findings ● Results of sample tests ● Recommendations, possible corrective measures, expected timelines.

PART V: FOLLOW-UP

● Recommendations for enforcement and sanctions ● Risk profile update: inherent risk, mitigation, and compliance ● Process and timelines for follow-up.

PART VI: STATISTICS

● Ongoing collection of statistics on supervisory activities (for example, number of risk assessments conducted or updated; number of off-site and on-site reviews; number of recommendations or enforcement actions and results of follow-ups; and other useful statistics to serve as metrics of the effectiveness of supervisory interventions) ● Analysis of statistics on supervisory activities and a feedback mechanism for findings to inform the supervisory process.

Source: World Bank. Note: AML = anti-money-laundering. CFT = combating the financing of terrorism.

COOPERATION BETWEEN PRUDENTIAL AND AML/CFT SUPERVISION

From the perspective of operational risk, AML/CFt is considered within the overall risk profile of a financial institution. Consequently, prudential and AML/CFt supervisors should coordinate their supervision efforts, especially when AML/CFt oversight is separated from the rest of prudential supervision.8 From the perspective of international standards, the Basel Core Principles include both prudential and AML/CFt elements, while the FAtF standards also incorporate elements of these core principles. several supervisory issues overlap between prudential and AML/CFt supervision, specifically in the areas of corporate governance, internal audit, and compliance. In particular, special attention should be paid to coordinating the supervision of compliance with due diligence obligations on beneficial ownership and politically exposed persons, including in the context of licensing and fit and proper assessment of shareholders and senior management of banks. Consequently, the risk assessments, supervision planning, and conduct of inspections should be coordinated with the prudential supervision departments to enable a holistic approach to supervision, but also to avoid duplication or gaps. especially in jurisdictions where the prudential supervisor is not the same as the AML/CFt supervisor,9 additional efforts are needed to coordinate and collaborate on AML/CFt supervision. the following issues need to be addressed when the prudential and AML/CFt supervisors are not the same:

● Do the AML/CFt supervisor and the prudential supervisor have the same or similar powers, including having access to all information required and the power to impose enforcement measures?

● Do the AML/CFt supervisor and the prudential supervisor have the same or similar legal protections?

● Do the AML/CFt supervisor and the prudential supervisor understand the overall context of their respective tasks?

● What is the standing of the supervisors within a sector?

● Do the supervisors have the mechanisms for cross-border cooperation with foreign supervisors, and do these exchange mechanisms cover a wide range of information, including data on beneficial ownership and politically exposed persons?

● Are there any restrictions for exchanging information between domestic prudential and AML/CFt supervisors, especially in relation to beneficial ownership and politically exposed persons?

● How are duplication of effort and the potential for conflicting supervisory actions minimized between the prudential and AML/CFt supervisors?

to address these issues, the Basel Committee on Banking supervision (BCBs) updated its guidelines on cooperation between prudential and AML/CFt supervisors in 2020 (BCBs 2020). Annex 5 to the “Guidelines: sound Management of Risks Related to Money Laundering and Financing of terrorism” provides further guidelines to strengthen the interaction and cooperation between prudential and AML/CFt supervisors. In particular, the guidelines provide for prudential and AML/CFt cooperation and information sharing in the following areas (BCBs 2020, annex 5, 46, par. 8):

1. Authorization-related procedures of a bank, including license applications, assessments of qualifying holdings, and fit and proper tests both at the time of authorization and on a continuing basis thereafter;

2. ongoing supervision, including assessment of governance, risk management, and internal control systems of a bank, business model and profitability drivers, operational risks, and compliance with AML requirements; and

3. enforcement actions or revocation of a banking license.

the euro area provides an example of the need for cooperation between prudential and AML/ CFt supervisors. An analysis from the european Parliament highlights the need for cooperation between prudential and AML/CFt supervisors in the euro area, where AML/CFt supervision mainly involves national competent authorities, and the european Central Bank is the prudential supervisor for significant institutions (european Parliament 2019). the analysis identifies areas for improving the integration of AML/CFt components into prudential supervision:

● AML/CFt supervisors should contribute their expertise to the authorization assessments of banks;

● Assessment criteria should be clearer when assessing whether the acquisition of a qualifying holding could increase the risk of ML/tF; and

● Prudential supervision should state specifically that institutions and their prudential supervisors need to assess the risk of financial crime.