This Report on the Observance of Standards and Codes for the Financial Action Task Force (FATF) 40 Recommendations for Anti-Money Laundering (AML) and 9 Special Recommendations on Combating the Financing of Terrorism (CFT) was prepared by the IMF Legal Department1. The report provides a summary of the AML/CFT measures in place in the Islamic Republic of Afghanistan and of the level of compliance with the FATF 40+9 Recommendations, and contains recommendations on how the AML/CFT system could be strengthened. The assessment is based on the information available at the time of the mission from January 23 to February 8, 2011 and other verifiable information subsequently provided by the authorities. It was conducted using the 2004 Assessment Methodology, as updated. The Detailed Assessment Report (DAR) on which this document is based was adopted by the Asia/Pacific Group on Money Laundering (APG) plenary on July 21, 2011. The views expressed here, as well as in the full assessment report, are those of the assessment team and do not necessarily reflect the views of the Government of Afghanistan or the Executive Board of the IMF.
B. Key Findings
1. Afghanistan is one of the poorest countries in the world and, after decades of ongoing conflicts and strife, it is still at an early stage of developing its legal and institutional framework. The main challenges that the authorities face are the precarious security situation (including regular occurrence of insurgency attacks), vested interests and corruption, capacity constraints, a large illicit narcotics sector, and a weak business environment.
2. Measures have nevertheless been taken to fight crime, including financial crime, and to lay the foundations for an AML/CFT regime. In particular, two legislative decrees were issued by the President in 2004 to fight against money laundering and terrorist financing (ML/TF). Although they still require Parliamentary approval, both decrees are enforceable and have been implemented, to a certain extent, by the authorities and the private sector.
3. However, current efforts are not commensurate with the high risk of ML/TF in the country. Illicit narcotics trade and corruption alone generate considerable amounts of illegal funds. Afghanistan is the world’s largest opium producer and exporter, with an export value of opiates estimated to amount to some US$4 billion. It also ranks amongst the most corrupt countries in the world with domestic proceeds of corruption estimated to be up to US$2.4 billion in 2009. Smuggling and fraud are other major sources of illegal funds. In addition, terrorism and its financing remain a major concern both in terms of the security of Afghanistan and of the funding of terrorist individuals or organizations, and terrorist acts in the country and abroad. Despite the authorities’ efforts, investigations into ML and TF have been few and none of them resulted in charges being brought before the courts.
4. Structural elements make the effective implementation of AML/CFT preventive measures challenging in some sectors. Both rudimentary financial relations (cash-based economy, low rate of financial intermediation in an environment characterized by illiteracy and a general lack of appropriate identification documents), and a small banking sector consisting of banks relatively well connected to the outside world (at least through correspondent accounts and SWIFT) coexist in Afghanistan. While preventive measures are certainly difficult to implement, even in the medium term, in relation to transactions in cash, they could be better implemented in the banking sector. Indeed, it would appear that the lack of implementation and supervision of preventive measures applicable to financial institutions, such as identification of customers and fit and proper testing played a role in the making of a major financial fraud in Afghanistan’s main commercial bank.
C. Legal Systems and Related Institutional Measures
5. The current government structure of Afghanistan is relatively new. After the December 2001 fall of the Taliban regime, a new Constitution was adopted, putting a new institutional framework in place. Over the last few decades, Afghanistan has witnessed continuous instability and conflict, which notably prevented the development of sound structural elements that could foster transparency and good governance.
6. From 2001 onwards, the authorities adopted legislative and institutional measures to increase their capacity to fight against crime. Laws, such as the Counter-Narcotics Law, were issued, and an anti-corruption strategy was adopted. New law enforcement agencies were established (notably the Major Crime Task Force, the Sensitive Investigation Unit, the Intelligence and Investigation Unit and the National Directorate of Security), and an Anti-Corruption Unit was created within the Attorney General’s Office. In 2004, the President issued two legislative decrees, namely the “Anti-Money Laundering and Proceeds of Crime Law” (the AML LD) and the “Law on Combating the Financing of Terrorism” (the CFT LD). Both decrees are still awaiting final endorsement by Parliament.
7. ML is criminalized in a way that meets most of the requirements under the FATF standard, but it does not apply to the full range of FATF-designated categories of offenses. Several of the activities listed in the standard (such as participation in an organized criminal group, kidnapping or illicit arms trafficking) have not been criminalized in Afghanistan, and therefore remain outside the scope of the ML offense. Provisional measures and confiscation may be ordered under the Counter-Narcotics Law, but are limited with respect to ML and other types of predicate crimes. While several investigations into ML have been pursued, none of them resulted in a case being brought before the courts.
8. TF has been criminalized, but nevertheless remains a major cause of concern in Afghanistan. Several terrorist groups are believed to be active in Afghanistan, notably A1 Qaeda. The CFT LD criminalizes the provision and collection of funds for the commission of a terrorist act. It does not, however, criminalize the collection of funds and their provision to terrorist individual or terrorist organizations, and the scope of the TF offenses is further limited by other deficiencies.
9. The current framework for freezing terrorist funds suffers from considerable shortcomings and has not been used effectively in practice. The mechanism in place for the implementation of the United Nations Security Council Resolution (UNSCR) 1267 is incomplete, and there is no framework for the implementation of UNSCR 1373. Considering the number of designated persons and entities that have links with Afghanistan, and, more generally, the high risk of TF in the country, this constitutes a major shortcoming of the current AML/CFT regime. Moreover, in one instance, the authorities ordered the freeze of an account held by a person designated under UNSCR 1267, but the President subsequently lifted the freezing order, thus reportedly enabling the holder of the account to withdraw the funds and leave the country.
10. A financial intelligence unit (FIU), the Financial Reports and Analysis Centre of Afghanistan (FinTRACA), was established in 2004, became operational in 2006 and has since led Afghanistan’s AML/CFT efforts, but additional measures need to be taken to ensure that it can effectively perform the core functions of an FIU. FinTRACA is the national center for the receipt, analysis and dissemination of suspicious transactions reports (STRs) from all reporting entities. In 2010, FinTRACA became a member of the Egmont Group of Financial Intelligence Units. Major shortcomings nevertheless remain in its current functioning. FinTRACA does not have the legal authority to disseminate financial information received from designated non-financial businesses and professions (DNFBPs). It is currently not operationally independent, notably because it lacks human and technical resources and a significant portion of its budget is dependent on foreign aid. It has not provided sufficient guidance regarding the manner of reporting. Finally, the collection of relevant information needs to be strengthened in order to allow for enhanced tactical, operational and strategic analysis of STRs and other relevant information.
11. The recent revamping of law enforcement in Afghanistan is a significant step forward but the relevant agencies do not appear to be effective in curbing crime, including ML/TF. Specialized agencies were created but their powers were not clearly defined in law. Moreover, although they have been granted the necessary investigative powers, they do not use them to their full extent. Poor coordination between law enforcement agencies has notably entailed a duplication of efforts and the squandering of scarce resources. Despite continuous efforts by the Afghan government and foreign donors to build the capacity of law enforcement, Afghanistan continues to be unable to expose and disrupt financial crimes in an effective way. This is notably due to limited resources, little expertise and corruption, as well as the lack of focus on the money trail, and a lack of clarity as to the level of evidence required to (i) initiate an investigation into, and (ii) secure a conviction for ML/TF.
12. Afghanistan has established a declaration system for the cross-border transportation of currency and bearer negotiable instruments both into and out of Afghanistan which, in practice, is only implemented (albeit in a limited way) at the Kabul international Airport (KIA). Implementation at crossings elsewhere along Afghanistan’s notoriously porous border is particularly challenging. The limited implementation of the declaration regime at KIA is further hampered by the proliferation of government agencies present at the airport, which do not have clearly articulated authorities.
D. Preventive Measures - Financial Institutions (FIs)
13. With the exception of intermediation in the securities sector, all financial activities covered under the standard are permitted in Afghanistan. The Afghan financial landscape has changed considerably over the last few years. The banking sector, in particular, although relatively small, has expanded significantly, and correspondent banking relationships have been established with FIs in several countries. Microfinance has also expanded. Most financial transactions are nevertheless conducted through money service providers (MSPs or hawaladars).
14. AML/CFT preventive measures are imposed on all FIs but need to be strengthened considerably. They are set out in the AML LD, the CFT LD, and, as far as banks and MSPs are concerned, in the central bank’s Regulation on the Responsibilities of Financial Institutions in the Fight against Money Laundering and Terrorist Financing (the AML/CFT RR). They impose basic customer due diligence (CDD) and record keeping measures but fall short of the standard in a number of instances. There are, for example, no requirements to determine whether a customer is acting on behalf of another person, to understand the ownership and control of legal persons, or to perform enhanced due diligence for higher risk categories of customers, business relationships or transactions; and there are no requirements in primary or secondary legislation to verify that a person purporting to act on behalf of a natural person is so authorized, or to conduct ongoing due diligence on business relationships. Despite the prevalence of corruption in Afghanistan, current measures to address the potential risk posed by politically-exposed persons are not sufficiently comprehensive. Overall, the implementation of CDD requirements is weak and is hampered by insufficient means to verify natural persons and establish the beneficial ownership and control of legal persons.
15. Correspondent relationships are not sufficiently regulated. There are no requirements, other than those pertaining to regular CDD, to gather information on the respondent institution to understand the nature of its business and determine its reputation and the quality of the supervision to which it is subject.
16. Pursuant to the wire transfer rules, most of the originator information required under the standard is included in the message. However, these rules lack clarity, in particular with respect to domestic transfers. Furthermore, the monetary threshold for triggering verification of the originator information is substantially higher than what is contemplated in the standard.
17. All FIs are required to submit STRs to FinTRACA, but few have done so in practice. Pursuant to the AML LD, STRs must be submitted when there are suspicions that a transaction (or attempted transaction) is related to or derived from the commission of an offense or that funds are linked to terrorism, terrorist acts or terrorist organizations. The scope of the ML reporting requirement is, however, too narrow considering that not all the predicate crimes listed under the standard have been criminalized in Afghanistan. In practice, some STRs have been submitted, but only by banks, and only with respect to suspicions of ML, and not TF.
18. FIs are required to develop internal policies, procedures and control to prevent ML, but no guidance has been provided on what exactly should be covered. The depth and coverage of the (limited) number of samples of policies and procedure that were provided to the assessment team varied from one institution to the other and, in some instances, were not in line with the requirements of the AML LD.
19. Market entry conditions and AML/CFT supervision fall short of the standard and the existing framework has not been effectively implemented, notably because of a general lack of resources and expertise, as well as vested interest and corruption. The central bank, the Da Afghanistan Bank (DAB), is responsible for the supervision of banks, including depository microfinance institutions, MSPs, and foreign exchange dealers. The Ministry of Finance has the authority to regulate and supervise the insurance sector. Market entry conditions are insufficient: there are, in particular, no measures in place to ensure the fit and properness of the beneficial owners and controllers of FIs, and no criminal background checks are conducted to prevent criminals and their associates from owning or controlling microfinance institutions.
20. Although considerable efforts have been deployed to bring MSPs under government monitoring in 26 out of 34 provinces, a large number of MSPs continue to operate outside the legal framework particularly in the provinces of Kandahar, Helmand and Herat. MSPs are required to obtain a license from DAB to operate and are subject to specific CDD obligations, but security constraints and limited resources have impeded the enforcement of these requirements in some parts of the country.
E. Preventive Measures - Designated Non-Financial Businesses and Professions
21. DNFBPs are subject to AML/CFT obligations under the AML LD, none of which have, however, been implemented. All the DNFBPs listed in the standard can operate in Afghanistan except casinos (which are forbidden), and notaries (which do not constitute a profession separate from that of lawyers). Trust and company services providers do not appear to be present in a meaningful way in the country. DNFBPs are subject to CDD, record keeping and reporting requirements to a similar extent as FIs, but have not started implementing these obligations. There is no supervisory framework for DNFBPs.
F. Legal Persons and Arrangements & Non-Profit Organizations
22. Transparency of the ownership and control of legal persons is insufficient. All legal persons must register with the Afghan Central Business Registry, but information on beneficial ownership is not collected and the general information entered in the registry is not updated. Legal arrangements such as trusts cannot be established under Afghan law, and according to the authorities, assets of foreign trusts are not held or managed in the country.
23. The authorities do not appear to account adequately for the risk of non-profit organizations (NPOs) being misused for TF purposes. NPOs play a vital role in Afghanistan. Over 1700 NPOs are registered and active throughout the country. According to law enforcement agencies, although no cases have been brought before the courts, there have been instances of NPOs being used to fund terror. The Ministry of Economy, which is the primary oversight body of the NPO sector, lacks sufficient resources to conduct its functions effectively and does not perceive the risk of misuse of NPOs for the purpose of TF.
G. National and International Co-operation
24. National coordination amongst the relevant authorities is weak. An informal AML/CFT committee was formed in 2009, bringing together the law enforcement agencies, FinTRACA and DAB, but it has not yet focused on operational matters.
25. A framework has been established to allow for international mutual legal assistance but it falls short of the standard and is rarely used. The AML and CFT LDs set out a broad range of measures that Afghanistan may take on behalf of a foreign state. The scope of the assistance that may be offered is, however, too limited considering notably that not all FATF-designated categories of offenses have been criminalized, and that very few steps have been taken to implement UNSCRs 1267 and 1373. Moreover, the authorities have very limited experience in assisting other countries.
|Compliant (C): the Recommendation is fully observed with respect to all essential criteria. |
Largely compliant (LC): there are only minor shortcomings, with a large majority of the essential criteria being fully met.
Partially compliant (PC): the country has taken some substantive action and complies with some of the essential criteria.
Non-compliant (NC): there are major shortcomings, with a large majority of the essential criteria not being met.
Not applicable (NA): a requirement or part of a requirement does not apply, due to the structural, legal or institutional features of a country.
|FATF 40+9 Recommendations and Ratings||Key Assessor Recommendations|
|Legal System and Related Institutional Measures|
|Criminalization of Money Laundering (ML)|
|Criminalization of Terrorist Financing (TF)|
|Confiscation, freezing, and seizing of proceeds of crime|
|Freezing of funds used for TF|
|The Financial Intelligence Unit and its functions|
|Law enforcement, prosecution and other competent authorities|
|Cross Border Declaration or disclosure|
|Preventive Measures: Financial Institutions|
|Customer due diligence, including enhanced or reduced measures|
|Third parties and introduced business|
|Financial institution secrecy or confidentiality|
|Record keeping and wire transfer rules|
|Monitoring of transactions and relationships|
|Suspicious transaction reports and other reporting|
|Internal controls, compliance, audit and foreign branches|
|Supervisory and oversight system–competent authorities and SROs Role, functions, duties and powers (including sanctions)|
|Money value transfer services|
|Preventive Measures: Non-Financial Businesses and Professions|
|Customer due diligence and record-keeping|
|Suspicious transaction reporting|
|Regulation, supervision, monitoring, and sanctions|
|Other designated non-financial businesses and professions|
|Legal Persons and Arrangements & Nonprofit Organizations|
|Legal Persons–Access to beneficial ownership and control information|
|Legal Arrangements-Access to beneficial ownership.|
|National and International Cooperation|
|National cooperation and coordination|
|The Conventions and UN Special Resolutions|
|Mutual Legal Assistance (MLA)|
|Other Forms of Cooperation|
|Resources & Statistics|
|Other relevant AML/CFT measures or issues|
|General framework - structural issues|
The assessment team consisted of Nadim Kyriakos-Saad, Senior Counsel (team leader); Nadine Schwarz, Senior Counsel, Emmanuel Mathias, Senior Financial Sector Expert, Chady El-Khoury, Counsel, and Melissa Tullis, Senior Projects Officer (all LEG); Emiko Todoroki, Senior Financial Sector Specialist (World Bank) and Raisa Sheynberg, Policy Advisor (U.S. Department of the Treasury).
In the DAR, this recommended action was also made with respect to Recommendations 2, 3, 10, 11, 13, 17, 26, and Special Recommendations VI and VII.
In the DAR, this recommended action was also made with respect to Recommendations 3, 4, 10, 11 and Special Recommendation III.