Kuwait’s Administrative Risk-based Model for the Prevention of Money Laundering: Costs and Benefits of Compliance with the Financial Action Task Force (fatf) Standards

In: Arab Law Quarterly
Author: Asim Jusic 1
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  • 1 Kuwait International Law School, Doha, Kuwait

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During the period from 2013-2015, Kuwait adopted the new administrative risk-based anti-money laundering and combating the financing of terrorism (aml/cft) regulatory framework. This article analyses the costs and benefits of the compliance of the new framework with the fatf’s standards, focusing on the structural changes: (1) a move from a hybrid-prosecutorial to a fully-fledged administrative model of financial intelligence unit; (2) adoption of the risk-based approach to the prevention of money laundering and terrorist financing (ml/tf); and (3) the increase in reporting obligations and preventive measures. The main argument advanced in the article is that while the new framework is highly compliant with fatf standards and will maintain the already low level of ml/tf in Kuwait, in comparison with the pre-2013 anti-money laundering regulations, the costs of compliance for reporting parties and clients are higher, and outweigh the benefits. The article suggests how to respond to this and other challenges.

  • 18

    Ibid., pp. 9-15. Customer due diligence (cdd), which is connected to the concept of ‘know your customer’ (kyc), is a list of measures and background information organisations need to take and acquire in order to assess their customers’ exposure to the risk of ml/tf. A suspicious transaction report (str) is (usually) an obligatory report organisations are required to submit to authorities in the event that the application of the cdd measures identifies a certain level of risk of exposure to the ml/tf: see Chaikin, supra note 1 at 22-24.

  • 22

    Ibid., p. 20.

  • 28

    Schott, supra note 4 at vii-9-vii-14.

  • 35

    See International Monetary Fund, supra note 33 at 11 Box 1.

  • 36

    Brigitte Unger and Frans Van Waarden, ‘How to Dodge Drowning in Data? Rule- and Risk-Based Anti Money Laundering Policies Compared’, Review of Law and Economics 5(2) (2009): 954-985.

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  • 37

    Ibid., pp. 956-958.

  • 42

    Chaikin, supra note 1 at 21. The Basel Committee sets standards for the regulation of banks, and its latest set of standards, Basel iii (the implementation of which has been extended until 2019), is meant to strengthen the regulation, risk management and supervision of banks: see Basel Committee on Banking Supervision, ‘International Regulatory Framework for Banks (Basel iii)’, (20 March 2015) at http://www.bis.org/bcbs/basel3.htm?m=3%7C14%7C572. It defines operational risk as ‘the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events’: see Basel Committee on Banking Supervision, ‘Principles for the Sound Management of Operational Risk—Final Document’ (30 June 2011): para. 10 note 5 at http://www.bis.org/publ/bcbs195.html. For an overview of various issues related to operational risk, including legal and compliance risk, and its management under the Basel Committee current standards (‘Basel 2.5’) see Michel Crouhy, Dan Galai and Mark Robert, The Essentials of Risk Management (New York: McGraw-Hill, 2014), 499-528. The Basel Committee explicitly endorses the fatf standards for prevention of the ml/tf: see Basel Committee on Banking Supervision, ‘Sound Management of Risks Related to Money Laundering and Financing of Terrorism’, (15 January 2014) at http://www.bis.org/publ/bcbs275.htm.

  • 43

    In the period June 2007 - October 2009, fatf devised nine different guidances on a risk-based approach for the financial sector, real estate agents, accountants, trust and company service providers, dealers in precious metals and stones, casinos, legal professionals, money service business and the life insurance sector: see fatf, supra note 26 at 126.

  • 45

    See Takats, supra note 5 at 9 note 4.

  • 60

    Decision No (37) of 2013, supra note 11, Art. 15.

  • 63

    See Reinier H. Kraakman, ‘Gatekeepers: The Anatomy of a Third-Party Enforcement Strategy’, Journal of Law, Economics and Organization 2(53) (1986): 53-104. Defined in a simple way, gatekeepers are private parties such as accountants, lawyers, bank managers, employers, etc., who are able to disrupt misconduct by withholding their cooperation from wrongdoers: see ibid., p. 53. Complications arise when the active and passive roles of gatekeepers in the process of law enforcement become mixed, and when gatekeepers also act as whistleblowers, as is the case in the aml/cft regulations: see the text in infra note 76.

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  • 71

    See Takats, supra note 5 at 4; and cf. Kraakman, supra note 63 at 76.

  • 72

    See Gordon, supra note 3 at 543. As a result of heavy penalties for non-compliance, in 2008 the number of suspicious transaction reports filed by financial institutions in the us reached the extraordinary figure of 733,000: see Unger and Waarden, supra note 35 at 967. Despite the huge increase in the number of reports submitted, the information received was of little use for the purposes of effective prosecution: see ibid., p. 970.

  • 74

    See, i.e., Mugarura, supra note 67 at 79-80, for an overview of the threats to privacy resulting from the application of the aml/cft regulations in the us.

  • 84

    Sara De Vido, ‘Anti-Money Laundering Measures Versus European Union Fundamental Freedoms and Human Rights in the Recent Jurisprudence of the European Court of Human Rights and the European Court of Justice’, German Law Journal 16(5) (2015): 1271-1292.

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  • 85

    Ibid., p. 1288.

  • 87

    Laurel S Terry, ‘Transnational Legal Practice (United States) [2010-2012]’, International Lawyer 47(499) (2013): 499-512. In order to prevent similar consequences, in the United States in 2010 the American Bar Association adopted Voluntary Good Practices Guidance for Lawyers to Detect and Combat Money Laundering and Terrorist Financing, a manual for lawyers (‘gatekeepers’) who help clients buy or sell property, establish trusts or estates, or help their clients create, operate or manage legal persons, including corporations: see American Bar Association, ‘Voluntary Good Practices Guidance for Lawyers to Detect and Combat Money Laundering and Terrorist Financing’ (2010) at http://www.americanbar.org/content/dam/aba/migrated/leadership/2010/annual/pdfs/116.authcheckdam.pdf.

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  • 88

    From 1 June 2014 to 31 December 2014, no suspicious transaction report was filed to the Kuwait Financial Intelligence Unit by lawyers: see menafatf, supra note 25 at 20. In the 2005-2009 period, a total of 5 strs were submitted by designated non-financial business and professions to the Kuwait Financial Intelligence Unit: see fatf, supra note 17 at 57 Table 13. The inconclusive data imply that a move from a rule-based to a risk-based approach had no significant effect upon lawyers’ work so far.

  • 89

    See Navin Beekarry, ‘The International Anti-Money Laundering and Combating the Financing of Terrorism Regulatory Strategy: A Critical Analysis of Compliance Determinants in International Law’, Northwestern Journal of International Law & Business 31(137) (2011): 137-194.

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  • 93

    Schott, supra note 4 at vii-7-vii-9.

  • 99

    Marina Solin and Andrew Zerzan, ‘Mobile Money: Methodology for Assessing Money Laundering and Terrorist Financing Risks’, GSMA Discussion Paper (2010): 6-13 at http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2013/09/amlfinal35.pdf.

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  • 101

    See Antoinette Verhage, The Anti Money Laundering Complex and the Compliance Industry (London: Routledge, 2011).

  • 103

    See Gordon, supra note 3 at 564.

  • 107

    See, i.e., Gordon, supra note 3 at 562-565; Halliday et al., supra note 3 at 49, arguing that ‘without demonstrations of benefits and attention to costs, the fatf global system and national aml/cft regimes risk a loss of legitimacy’.

  • 108

    David A. Chaikin, ‘How Effective Are Suspicious Transaction Reporting Systems?’, Journal of Money Laundering Control 12(238) (2009): 238-253.

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  • 109

    Saperstein et al., supra note 58 at 9.

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