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A Critical Review of Technical Compliance by Lawyers, Accountants, and Notaries according FATF

Miguel Cassagne

(Founder of CASSAGNE Consulting)

July 17, 2024

Introduction

Corruption, money laundering, and the financing of terrorism pose serious threats to the integrity of financial systems and global security. These crimes not only undermine economic stability but also erode public trust in institutions. In this context, professionals and entities known as "Guardians" - including lawyers, accountants, and notaries - play a crucial role in the prevention and detection of these crimes.

The importance of the technical compliance of these Guardians has been emphasized by the Financial Action Task Force (FATF), an organization that sets international standards for combating money laundering and the financing of terrorism (AML/CFT).

Due to the nature of their functions, Guardians can be exploited by criminals to conceal or legitimize illicit gains. For example, a lawyer might be used to create complex corporate structures that obscure the true ownership of assets, while an accountant might facilitate financial transactions that disguise the origin of illicit funds.

The work of the Guardians is fundamental to preventing these services from being used for criminal purposes. However, the effectiveness of this work largely depends on the ability of the Guardians to comply with the established prevention regulations and policies.

This article offers a critical review of the technical compliance of the Guardians concerning corruption, based on the evaluations and recommendations of the FATF, with a particular focus on the FATF report issued on July 8, 2024, entitled ?Horizontal Review of Gatekeepers? Technical Compliance Related to Corruption?. Additionally, improvements to the current system will be proposed to strengthen the fight against these crimes.

Furthermore, in the context of the issues introduced by the FATF report under analysis, the case of Argentina will be examined, a country that has taken significant steps to improve the technical compliance of its Guardians as part of the FATF?s Fourth Round of Mutual Evaluations.

Chapter I: Technical Compliance and the Role of the Guardians.

Technical compliance refers to the implementation of measures, procedures, and policies that Guardians must follow to detect and report suspicious activities.

These professionals act as intermediaries in financial and commercial transactions, and their position allows them to identify and prevent suspicious movements that could be linked to criminal activities.

The FATF, through its recommendations, establishes a regulatory framework that countries must adopt to ensure that Guardians fulfill their obligations.

This framework includes client identification and verification, record-keeping, and the obligation to report suspicious transactions to the competent authorities.

However, the effectiveness of these measures depends on the correct implementation and compliance by the Guardians.

1.1. FATF Recommendations.

The FATF has issued 40 recommendations covering various aspects of the fight against money laundering and the financing of terrorism. Several of these specifically focus on Guardians. For example, Recommendation 22 requires lawyers, notaries, accountants, and other professionals to conduct due diligence on clients when preparing or carrying out transactions involving the purchase and sale of real estate, the management of client money, securities, or other assets, the management of bank, savings, or securities accounts, the organization of contributions for the creation, operation, or management of companies, or the creation, operation, or management of legal persons or arrangements.

1.2 Importance of Technical Compliance.

The importance of technical compliance cannot be underestimated. According to a FATF report, approximately 70% of money laundering and terrorism financing cases involved the participation of Guardians who did not comply with current regulations.

The lack of technical compliance not only facilitates the commission of crimes but also exposes Guardians to severe sanctions, including significant fines, loss of professional licenses, and irreparable damage to their reputation.

Chapter II: FATF Assessment of Technical Compliance.

The FATF conducts periodic assessments of national systems to ensure they comply with its standards. These assessments include a review of national legislation, the effectiveness of its implementation, and the capacity of authorities to supervise and enforce the regulations.

In its evaluations, the FATF uses a rigorous methodology that includes reviewing documentation, interviewing representatives from the public and private sectors, and conducting on-site visits.

2.1. FATF Assessment Methodology.

The FATF assessment methodology is based on two main components: technical compliance and effectiveness assessment.

Technical compliance refers to the extent to which a country has implemented the FATF recommendations in its laws and regulations.

Effectiveness, on the other hand, refers to the extent to which these laws and regulations are effectively applied in practice.

2.2 Evaluation Results.

The results of the FATF assessments have revealed several common challenges countries face in implementing its recommendations.

For example, in a recent evaluation, the FATF found that only 30% of the assessed countries had a high level of technical compliance regarding Guardians.

Additionally, only 20% of the countries demonstrated high effectiveness in applying these regulations.

2.3 Specific Case of Argentina.

Although Argentina was not part of the analysis described in the July 2024 FATF report, the country is currently undergoing the Fourth Round of Mutual Evaluations, in which its technical regulatory framework and the effectiveness of its prevention system will be analyzed.

In this regard, although the FATF has concluded its on-site visit to the country, it is still in the process of presenting the first draft of the report on the results of this evaluation, which will then be discussed in the FATF plenary.

Therefore, despite not being able to predict the outcome that Argentina will have in both aspects of the evaluation, particularly in those related to the sectors of the economy known as Guardians, it is worth mentioning that these economic actors are considered by our country as Obligated Subjects due to their inclusion in the exhaustive list of obligated entities to inform Argentina FIU in Article 20 of Law 25.246.

It should be noted that lawyers, the only Guardians who until 2024 were not considered obligated subjects to establish policies for the Prevention of Money Laundering, Financing of Terrorism, and Proliferation of Weapons of Mass Destruction (AML/CFT/CPF), were included in the list of Article 20 by virtue of Law 27.739, published in the Official Gazette on March 15, 2024.

Indeed, through Law 27.739, Law 25.246 was amended, and concerning Guardians, specifically:

- It modifies, following the guidelines of section (d) of FATF Recommendation 22 previously transcribed, the consideration that every Public Notary was an obligated subject (Art. 20, section 12, previously in force), reserving this condition only for those notaries who perform the activities specifically indicated in the text of the new section 17 of Art. 20 of Law 25.246.

In this regard, the text of section 17 of Art. 20 only considers as obligated subjects those notaries who, on behalf of and/or for their clients, prepare or effectively carry out any of the following transactions: a) Purchase and/or sale of real estate; b) Management of money, securities, and/or other assets; c) Management of bank, savings, and/or securities accounts; d) Organization of contributions for the creation, operation, or management of legal persons or other legal structures; and e) Creation, operation, or management of legal persons or other legal structures and the purchase and sale of businesses and/or interests in legal persons or other legal structures.

- It also modifies, in line with the text of section (d) of FATF Recommendation 22, the universe of Public Accountants that were previously considered Obligated Subjects, reserving this category for those who perform the activity described in the text of the new section 17 of Art. 20 of Law No. 25.246, that is, those public accountants who, acting on behalf of and/or for their clients, prepare or effectively carry out any of the following transactions: a) Purchase and/or sale of real estate; b) Management of money, securities, and/or other assets; c) Management of bank, savings, and/or securities accounts; d) Organization of contributions for the creation, operation, or management of legal persons or other legal structures; and e) Creation, operation, or management of legal persons or other legal structures and the purchase and sale of businesses and/or interests in legal persons or other legal structures.

Additionally, those who prepare limited review reports of financial statements under the conditions established by regulation and those who prepare audit reports of financial statements are also subject to this obligation.

- It incorporates, in line with the text of section (e) of FATF Recommendation 22, as new obligated subjects, individuals and/or legal entities or other structures with or without legal personality that, habitually prepare or effectively carry out any of the following transactions on behalf of and/or for their clients: a) Act as an agent in the creation of legal persons; b) Act themselves or facilitate the performance of others as a director, attorney-in-fact, partner, or similar position depending on the legal person or legal structure in question; c) Provide a legal, commercial, or postal address and/or physical space for legal persons or other legal structures; and d) Act as a trustee themselves (or facilitate the performance of others) of a non-financial trust or serve an equivalent function for another form of legal structure.

- It also incorporates as obligated subjects, in line with the text of section (d) of FATF Recommendation 22, lawyers and any other professional only when they, acting on behalf of and/or for their clients, prepare or effectively carry out any of the following transactions: a) Purchase and/or sale of real estate; b) Management of money, securities, and/or other assets; c) Management of bank, savings, and/or securities accounts; d) Organization of contributions for the creation, operation, or management of legal persons or other legal structures; and e) Creation, operation, or management of legal persons or other legal structures and the purchase and sale of businesses and/or interests in legal persons or other legal structures.

In addition to being considered obligated entities by Law 25.246, the Financial Information Unit of Argentina (FIU) has not only regulated and set out the AML/CFT/CPF policies to be adopted by each of these Guardians but has also updated these policies in most cases to the current international standards and FATF recommendations.

In this regard, it is worth reviewing each of these regulations issued by the Financial Information Unit of Argentina to understand the effort our country has been making in recent years to meet the objective of the FATF reflected in the report discussed in this article.

Regarding the Guardians, the FIU issued the following specific resolutions applicable to each of them:

(a) FIU Resolution No. 242/2023 - Applicable to the Notary Sector.

This resolution, published in the Official Gazette on October 30, 2023, applicable to notaries, will come into effect on March 1, 2024, thus nullifying the previous FIU Resolution No. 21/2011, thereby updating the regulatory framework for AML/CFT for the obligated subjects under Article 20, Paragraph 3 of Law No. 25.246, under a Risk-Based Approach (RBA).

The main points it introduces are: (a) The self-assessment of risks must consider factors such as clients, products, channels, and geographical areas; (b) The first Self-Assessment Report must be submitted in 2026; (c) The Independent External Review (IER) should be conducted biennially or replaced by an audit from the professional college; (d) Updating thresholds for the monthly reporting of real estate transactions, the establishment of legal persons, etc.; (e) Establishment of an annual institutional report of activities.

(b) FIU Resolution No. 42/2024 - Applicable to Registered Public Accountants.

This resolution, published in the Official Gazette on March 18, 2024, updates the regulatory framework for AML/CFT, under an RBA after 13 years.

The new regulation applies only to accountants who, on behalf of and/or for their clients, prepare or carry out any of the following specific activities: (i) Purchase and/or sale of real estate when the amount exceeds 700 Minimum, Vital, and Mobile Wages (SMVM); (ii) Administration of assets and/or other assets when the amount exceeds 150 SMVM; (iii) Administration of bank accounts, savings accounts, and/or securities when the amount exceeds 50 SMVM; (iv) Organization of contributions to create, operate, or administer legal persons or other legal structures; (v) Creation, operation, or administration of legal persons or other legal structures, and the purchase and sale of business entities and/or shares of legal persons or other legal structures.

It also applies to those who perform external audits of financial statements with general purposes to obligated subjects of Law 25.246 and/or to those who, not being so, according to the audited Income Statement, have gross income equal to or greater than 4000 SMVM.

Its objective is to establish new minimum requirements for identifying, evaluating, monitoring, managing, and mitigating money laundering and terrorist financing risks in accordance with FATF Recommendations.

The main points to consider in the new regulation include: (a) Introducing the Risk-Based Approach (RBA) to client monitoring, as established by FATF Recommendation 1; (b) Mandatory submission of technical Self-Assessment risk reports; (c) Adding the obligation to conduct Independent External Reviews every 2 years; (d) Mandatory reporting of Audited Entities, Annual Systematic Reports (ASR), and Monthly Systematic Reports (MSR); (e) Detailing policies and indicative alerts as a guide to reinforce AML/CFT systems.

FIU Resolution No. 42/2024 takes effect the day after its publication, repealing FIU Resolution No. 65/2011.

This resolution, published in the Official Gazette on March 18, 2024, applicable to people engaged in real estate brokerage, took effect on March 19, 2024, thus nullifying the previous UIF Resolution No. 16/2012, thereby updating the regulatory framework for AML/CFT/CPF for these obligated subjects under an RBA after 12 years.

Its objective is to establish new minimum requirements for identifying, evaluating, monitoring, managing, and mitigating money laundering and terrorist financing (ML/TF) risks that real estate brokers must adopt, in accordance with FATF Recommendations.

The new regulation considered the ?Guide for a risk-based approach applied to the real estate sector? published in 2022 by FATF.

Among the main points to consider are: (a) Introducing the Risk-Based Approach (RBA) to client monitoring, as established by FATF Recommendation 1 (which suggests implementing it to identify, evaluate, and understand risks to mitigate them); (b) Mandatory submission of technical Self-Assessment risk reports, considering National Risk Assessments for ML/TF/FP, among others, identifying risks related to specific activities and those identified by the obligated subject themselves; (c) Adding the obligation to conduct Independent External Reviews every 2 years; (d) Mandatory submission of Annual Systematic Reports (ASR) to be submitted between January 2 and March 15 each year, and Monthly Systematic Reports (MSR) to be submitted between the 1st and 15th of the following month; (e) Detailing policies, procedures, and controls, indicative alert signs, and controls that serve as a guide to reinforce AML/CFT systems; (f) Mandatory updating of manuals every 2 years, considering among others, the results of National Risk Assessments for ML and TF/FP.

(d) FIU Resolution No. 48/2024 - Applicable to Corporate Lawyers.

This resolution, issued on March 25, 2024, established for the first time the regulatory framework for AML/CFT/CPF applicable to lawyers in Argentina.

This is considering that, in accordance with the provisions of the new Article 20, paragraph 17 of Law 25.246 (as amended by Law 27.739), they became obligated subjects to inform the UIF, in full compliance with FATF Recommendation 22.

This regulation does not apply to all lawyers, but only to those who, on behalf of and/or for their clients, prepare or carry out: (i) Purchase and sale of real estate exceeding 700 Minimum, Vital, and Mobile Wages (SMVM); (ii) Administration of assets and/or assets exceeding 150 SMVM; (iii) Administration of bank accounts, savings accounts, and/or securities exceeding 50 SMVM; (iv) Organization of contributions to create, operate or administer legal persons or other legal structures; (v) Creation, operation, or administration of legal persons or other legal structures, and the purchase and sale of business entities and/or shares of legal persons or other legal structures.

In general, the regulation establishes minimum requirements for the identification, evaluation, monitoring, and mitigation of ML, TF, and PF risks, based on a Risk-Based Approach, in accordance with FATF Recommendation 22.

Among its main points are: (a) The obligation to have an AML/CFT/CPF proliferation system that includes, among others, the preparation of an AML/CFT/CPF proliferation Manual, the establishment of annual training programs in the matter, the establishment of documentation retention policies, client due diligence (KYC) policies developed on an RBA, and the monitoring of these according to their risk level, in accordance with FATF Recommendation 1; (b) The obligation to submit technical Self-Assessment Risk reports (every 2 years) and the evaluation methodology (every 4 years); (c) The obligation to evaluate their system through Independent External Reviews (IER) (every 2 years); (d) The obligation to submit Suspicious Activity Reports for ML, TF, and CPF, unless the relevant information is obtained in circumstances covered by professional secrecy (according to the Interpretive Note to FATF Recommendation 23); (e) The requirement to submit Annual Systematic Reports (ASR) and Monthly Systematic Reports (MSR). Additionally, the regulation suggests policy and indicative alerts as a guide to reinforce the AML/CFT/CPF systems of lawyers.

FIU Resolution No. 48/2024 took effect the day after its publication (i.e. from 03/26/2024).

2.4. Challenges Identified by FATF.

Referring to the document issued by FATF in July 2024, it is necessary to highlight the challenges identified by this organization, namely:

2.4.1. Lack of Knowledge and Insufficient Training:

Many Guardians do not have a deep understanding of their obligations under AML/CFT regulations. The lack of adequate and ongoing training is one of the main obstacles to effective compliance. According to a FATF study, 60% of non-financial Guardians surveyed had not received any training on their AML/CFT obligations in the past three years.

2.4.2. Limited Resources:

Some entities do not have the necessary resources to implement effective preventive measures. This may be due to financial constraints or lack of access to advanced technologies that facilitate the detection of suspicious activities. A FATF report indicates that 40% of Guardians in developing countries lack the resources needed to fully comply with AML/CFT regulations.

2.4.3. Risk of Sanctions:

Non-compliance can lead to administrative, reputational, and criminal sanctions. Sanctions not only affect business operations but can also negatively impact public trust in these professionals.

In a recent case, a law firm in Europe was fined 2 million euros for failing to comply with client due diligence regulations.

Chapter III: Improvement Proposals and Critical Vision

To strengthen the fight against corruption, money laundering, and terrorism financing, it is imperative to propose strategic improvements and adopt a critical vision.

The evolving landscape of financial crimes necessitates that Guardians, such as lawyers, accountants, and notaries, continuously adapt to new challenges and enhance their compliance measures. This chapter outlines several key areas for improvement and provides practical examples to illustrate how these strategies can be effectively implemented. The proposals aim to address current gaps and reinforce the existing framework by incorporating advanced technologies, international best practices, and comprehensive policy measures.

By doing so, Guardians can not only fulfill their regulatory obligations but also contribute to a more transparent and secure financial system.

3.1 Increased Training and Awareness.

It is crucial for Guardians to receive continuous training on their responsibilities and best practices for preventing money laundering and terrorism financing. Establishing mandatory and accessible training programs, both in-person and online, can significantly improve compliance. For instance, annual workshops and webinars hosted by regulatory bodies or specialists can help keep professionals updated on the latest regulations and techniques.

3.2 Implementation of Advanced Technology.

Using advanced technologies such as artificial intelligence and big data analysis can help Guardians identify suspicious patterns more efficiently. Technological solutions offer more precise and user-friendly monitoring and reporting tools, facilitating regulatory compliance.

3.3 Strengthening Supervision and Technical Support.

Authorities must strengthen their supervisory capabilities and provide technical support to Guardians. International collaboration and information exchange are essential to combat corruption effectively. For example, establishing cross-border task forces can enhance the ability to track and intercept illicit financial flows.

Additionally, regulatory authorities should provide clear and detailed guidelines on Guardians' obligations and offer technical assistance for implementing these measures. For instance, creating a dedicated support hotline for compliance queries can help resolve issues promptly and ensure consistent adherence to regulations.

3.4 International Best Practices.

Analyzing best practices adopted by other countries can offer valuable lessons. Countries with robust prevention systems can serve as models, and their successful strategies can be adapted to other national contexts.

For example, some countries have implemented certification programs for Guardians to ensure that these professionals have the knowledge and skills necessary to fulfill their obligations. In the UK, the Financial Conduct Authority (FCA) provides detailed compliance guides and conducts regular audits to ensure high standards. Adopting similar measures can elevate the effectiveness of AML/CTF efforts in other jurisdictions.

3.5 Policy Proposals.

3.5.1. Development of Clear Guidelines.

Regulatory authorities should provide clear and detailed guidelines on Guardians' obligations. These guidelines should be accessible and easy to understand to ensure that all Guardians, regardless of their size or resources, can comply with regulations.

3.5.2. Incentives for Compliance.

Offer incentives to Guardians who demonstrate a high level of compliance to motivate greater commitment to prevention policies.

These incentives could include public recognition, financial rewards, or reduced regulatory scrutiny.

For instance, a compliance excellence award could be instituted to honor firms that exhibit exemplary adherence to AML/CTF standards, thereby encouraging others to follow suit.

Chapter IV: Impact of Non-Compliance and Relevant Cases.

4.1 Consequences of Non-Compliance.

Non-compliance with AML/CTF/CPF regulations can have serious consequences. Penalties can include significant fines, loss of professional licenses, and reputational damage. Additionally, non-compliance can facilitate criminal activity, allowing criminals to use Guardians' services to launder money or finance terrorist activities.

4.2 Relevant Cases and Lessons Learned.

Examining relevant cases of non-compliance can offer valuable lessons for Guardians. For instance, in several cases, inadequate due diligence has allowed criminal organizations to use professional services to hide their activities. In one notable case, a law firm in Latin America was used by a drug cartel to launder millions of dollars through real estate purchases and the creation of shell companies. The firm had not implemented adequate client identification and verification measures, allowing suspicious transactions to go unnoticed.

4.3 Lessons Learned.

These cases highlight the importance of implementing strict due diligence measures and maintaining a high level of vigilance over client transactions. They also underscore the need for effective supervision by regulatory authorities and the importance of international cooperation in combating these crimes.

Chapter V: Conclusion.

Guardians' technical compliance is a critical component in the fight against corruption, money laundering, and terrorism financing.

While the FATF has established a robust framework to guide countries in this area, effective implementation remains a challenge. Through continuous education, strengthening resources, standardizing regulations, and promoting collaboration and transparency, it is possible to significantly improve Guardians' ability to meet their obligations and contribute to a safer and more reliable global financial system.

Ultimately, combating these crimes requires a concerted effort from all stakeholders. Guardians, with their strategic position and specialized knowledge, are uniquely positioned to make a significant difference.

By improving technical compliance and fostering a culture of compliance, they can play a fundamental role in protecting the integrity of the financial system and global security.

Argentina, with its recent reforms and the introduction of new regulations, serves as an example of how countries can advance the effective implementation of FATF recommendations.

As the country prepares for the presentation of its evaluation report, the lessons learned and challenges identified can offer valuable insights for other countries in the region and beyond.

Strengthening technical compliance in Argentina will not only enhance its financial system but also contribute to the global fight against these serious crimes.