Examination of Witnesses (Questions 388
- 399)
WEDNESDAY 22 APRIL 2009
Sir James Sassoon
Q388 Chairman: Sir
James, welcome. We much appreciate your coming. The Committee
has received a document which is a report on money laundering
by the Financial Action Task Force Secretariat. They were not
content to come and talk to us and we perhaps might ask you more
questions about that. We are delighted that you were able to come.
Maybe you would like to introduce yourself, but at the same time,
if I could link that with the first question with regard to this
inquiry, if you could tell us what in your experiences are the
main strengths and weaknesses of FATF.
Sir James Sassoon: My name is James Sassoon.
I acted as President of the Financial Action Task Force, the FATF,
for the 12 months up to June 2008. As you probably know, the presidency
rotates on an annual basis and I should hasten to add that I came
at this as a non-expert on money laundering and terrorist financing
issues. On the strengths and weaknesses of the FATF, let me take
three strengths first and then pick out three areas of weakness.
First, on the strengths, I think it is remarkable that through
an entirely consensus-driven process of standard setting this
body has developed a set of 40 plus nine recommendations that
have global acceptance and endorsement. Second, linked to that,
I think it is a huge strength of the organisation that while it
has 34 members, actual full members of the organisation, there
are over 180 countries now committed to the FATF recommendations
through membership of either the FATF or of the so-called FATF
Style Regional Bodies, of which MONEYVAL is one. There are very
few countries in the world now that are not at least in principle
and by voluntary buy-in to the process committed to the adoption
of the full 40 plus nine recommendations. The third strength of
the organisation, which I think is unique, is the peer review
process which countries, in my experience, take enormously seriously
and is a key driver in ensuring that the recommendations are implemented
and countries continue to work to implement the standards better
as the rounds of evaluation carry on. As I am sure you know, we
are ending the third round of evaluations by the FATF within the
next two years. On the weaknesses, one of the things that struck
me when I started to get involved in the work of FATF was that
it is the area of financial services policymaking where the policymaking
was least rooted in hard evidence. We may talk about this a bit
later, about some of the measures that the UK under its presidency
proposed to try and get the FATF to give more consideration to
measuring the outcomes over time of its recommendations and the
costs that the recommendations entail. This is a very, very difficult
area but I do think it is a major weakness. Second, I think that
the organisation, having started as a task force with broad principles,
is getting dragged down to a degree of detailed interpretation
and guidance, and methodology for the evaluations which now need
to be questioned quite hard. There is a danger of a one-size-fits-all
approach to the adoption of the recommendations. For example,
there are always debates about how you apply the recommendations
very differently in civil law and common law jurisdictions and
there is a danger that this gets significantly in the way of the
substance of what the FATF is trying to achieve. Third, and again
linked to that, I would say that there is a danger and a risk
that the assessments are getting too much focused on inputs and
legal frameworks and forms and not enough on the effectiveness
that is the ultimate objective.
Q389 Lord Marlesford:
Following that up, Sir James, one of the impressions that some
of us, or at least I had from our interrogation of SOCA about
their SARs database is that they do not discriminate between what
is important and serious and the trivial and I think there is
a danger of them having a huge amount of data, much of which is
really irrelevant to anything that could be called serious crime,
money laundering or terrorism. Is this at all a problem with the
FATF?
Sir James Sassoon: I cannot comment on the specifics
of SOCA. I do think that it raises a very important general point
on which I would hope that over time the FATF could shed some
useful light, which is that as there is more global evidence developing
of the way that suspicious transactions are reported and the actions
that are taken on them, we can learn some real lessons by looking
across, if not all countries, cross-sections of countries. I would
be very keen for the FATF to be promoting much more research in
this area. It is something that the revised mandate of the FATF,
which was endorsed by ministers during the UK's Presidency year,
now places on the table and I think the FATF can help to shed
light on what is coming out of this activity, not just in the
UK but globally.
Q390 Lord Richard:
Sir James, I wonder if I could put to you some of the evidence
we have actually been given and perhaps ask for your comments
on it. We heard evidence from Professor Alldridge, who is the
professor at Queen Mary looking at this, and what he said was:
"FATF, in my view, needs a constitution. It was established
in 1989 as an offshoot of the G7. It has operated on essentially
an ad hoc basis for the last 20 years and a temporary basis for
the last 20 years. Its decision-making, its policymaking and its
information-seeking practices are by no means clear. I spent some
time looking at their website yesterday and asking myself questions
like, how exactly do you get to be a member of the FATF, how does
it function, how does it make the rules and how does it come up
with its recommendations? These matters are not as clear as they
should be". I was wondering, do you share that view that
they are not as clear as they should be?
Sir James Sassoon: No, I think they are not
as clear.
Q391 Lord Richard:
Can I just put the second half of the question. If you did share
that view do you think it has an effect upon the efficiency of
the organisation?
Sir James Sassoon: I read the transcript of
that evidence with some interest because it does not bear much
resemblance to anything that I recognise. Just to take, in a sense,
a trivial point, I double-checked that if you go to the FATF website
there is a very clear set of rules for membership which is entirely
publicly disclosed. I do not know whether there was some difficulty
accessing the website, but even on some of the specific detail
I would challenge that evidence. More broadly, the FATF is a very
interesting entity. You have much more experience of comparative
accountability and transparency of other international bodies,
but it did strike me, when I first came at it, as a rather extraordinary
entity in a way. When you look at the elements of accountability,
there is a mandate which is set for eight years by the ministers
of the member countries, that is reviewed at midway through the
eight year term, so the mandate is re-looked at every four years,
that ministers meet—we convened under our presidency a meeting
of ministers in Washington around the fringes of the spring 2008
IMF and World Bank meetings; we got a very high attendance of
ministers with a short, focused, very good discussion about two
or three of the key issues, including accountability, private
sector engagement and so on; it was a good discussion—and
there are annual reports to ministers So in terms of the accountability,
there is a high degree of it. In terms of how decisions are taken
within the organisation, there was an implication in the evidence
you have had that there is a sort of small black box which is
the FATF, out of which recommendations come and then they are
uncritically adopted by the EU and other people—and it is
all very unsatisfactory. It is perhaps worth saying that as well
as the 34 members of the organisation there are associate members,
including the regional bodies, one of whom is MONEYVAL, who make
very positive and important contributions to all the discussions,
and there are some 20 other organisations who attend and speak
at the meetings, including the IMF, the World Bank and the relevant
agency of the United Nations, and other groupings of international
regulators. I have to say as somebody who has chaired three day
long plenary sessions where all the decisions have to be made
by consensus, when you have 65 organisations and around120 people
in the room, I find this is a somewhat different picture than
I have from the one Professor Alldridge gives. Having said that,
I do think there are one or two areas in which the FATF could
usefully improve its accountability. I think it is very striking
that the FATF is the only global standard setting body that is
not a full member of the Financial Stability Forum, which will
become the Financial Stability Board. Having pushed for membership,
I could understand why the Financial Stability Forum was initially
unwilling to open up its membership because there were lots of
other countries who were pressing to be members. But when the
G20 very significantly increased the membership of the Financial
Stability Forum at the recent London meeting it seemed to me a
missed opportunity for the FATF to have been put on to the Financial
Stability Forum because that would create another layer of useful
oversight and a sense check on the FATF's processes. That is one
area for improvement. The other one is the question of how willing
the FATF is to take forward membership applications, quite independent
of what the rules say about the membership criteria. The FATF's
stance on whether or not it is truly open to increasing its membership
over time is something which is perhaps not as clear to non-members
as it could be.
Q392 Lord Richard:
What is it that not is clear, what you have to do to become a
member or qualifications to become a member?
Sir James Sassoon: The technical criteria are
laid out with great clarity, but alongside the technical criteria
that need to be met there is a question, that I suppose many clubs
have as to what is the appropriate total size of membership should
be; on the one hand to make sure that this consensus-driven organisation
is able to make decisions and it does not become too unwieldy;
but, on the other hand, to make sure that its membership is sufficiently
inclusive of a spread of countries which is reflective of where
global financial activity is taking place. The membership of the
FATF has evolved over time. China was admitted 18 months ago.
It is by no means a closed door, but there are questions that
an outsider might justifiably ask as to what the future membership
approach of the FATF is going to be.
Q393 Lord Richard:
You make it sound like the Garrick! Can you blackball a candidate?
Are they blackballed?
Sir James Sassoon: Membership, like everything
else, has to be dealt with on a consensus basis.
Q394 Lord Richard:
If I can sum up your evidence it is really this: the FATF is sufficiently
accountable, sufficiently transparent and the decision-making
process is clear, sufficiently clear.
Sir James Sassoon: I have suggested one practical
and important enhancement to that, which is through membership
of the Financial Stability Forum.
Q395 Lord Hannay of Chiswick:
If I could follow up and say how delighted I am that you gave
such a masterly response to the Professor, with whom I disagreed
strongly. He also said that what he thought would be the right
way would be for all this to be turned into a legal international
convention, which was the point I most strongly disagreed with
because it seemed to me that in the negotiation of this in international
legal form you would probably end up with a lot of gaps, let-outs
and so on. Moreover, you would come across the problem of ratification
by the US Senate, for example, which would probably be very difficult
indeed, and therefore this was highly undesirable. Do you agree
that is another reason why it is best left on the present basis?
Sir James Sassoon: I prefaced my last answer
very carefully with saying that I, unlike several of you here,
am not a great expert on this subject. Having said that, I entirely
agree with your logic and I do think this interesting constitutional
set-up of the FATF has served it well over the last 20 years.
Q396 Baroness Henig:
One of the four essential objectives of the FATF under its current
mandate is to engage with stakeholders and partners throughout
the world. I wonder if you could tell us what was the nature and
extent of the FATF's interaction with the private sector at the
time you assumed office, and what improvements you were able to
bring about? Secondly, what is the scope for extending and deepening
that relationship in the future?
Sir James Sassoon: At the time we took over
the presidency in 2007 I would say that the engagement with the
private sector was patchy, it was not systematic and it was certainly
not up to the standards that many of the individual countries
would adopt when engaging with stakeholders to set financial services
policy domestically. It was a bit of a surprise to me to discover
that finance ministries when setting all sorts of domestic rules
would engage with the private sector in a completely different
way from the way they were content for the FATF to do it. Having
said that, there was some engagement, it was not that there was
no engagement, but there was very much a view that the FATF was
a public sector group of people and we told the private sector
down the chain what they had to do. The UK's predecessor holding
the presidency was Canada and they actually helped through joint
working with the UK to push this agenda forward and, indeed, the
South Africans and other presidencies before had all picked this
up but had found it very difficult to get any traction. Maybe
we came in at the right time, but we certainly made it a priority
and we did make some very significant progress. We set up a standing
consultative forum through which the private sector can now input
ideas for the work plan and the agendas of the FATF and its working
groups and through which we can give the private sector more consistent
feedback on the work of the FATF. For the first time, and this
was perhaps the thing that was most surprising to me, we did joint
work on typologies. These are the case study exercises on particular
areas of fraud or terrorist financing. We had a very effective,
and much appreciated by the private sector, series of workshops
in London in December 2007 to look at big areas like VAT carousel
fraud, proliferation financing—four or five issues on which
the private sector wanted to really understand how the public
authorities were coming to them. So we kicked off typology work
with the private sector and there is now an agreement that all
future typology work that the FATF does will be run past the private
sector. We also involved them in a series of streams of work to
develop risk-based approaches to different sub-sectors. We initiated
a lot of work and I have to say that the very good news is the
Brazilians, who hold the presidency now, and the Netherlands that
follow are equally committed to private sector engagement. I am
optimistic but there is much more that needs to be done. In my
answer to the first question I said that much more needs to be
done on the whole evidence base that underpins the FATF's work,
particularly with the private sector as we put ever more reliance
on them to be the frontline in the battle against money laundering
and terrorist financing; and we do have to explore with them in
much more detail what the cost burden is that the public authorities
are putting on them and what the results are that are coming out.
It also comes back to what is happening to Suspicious Activity
Reports. There is only a certain length of time when we can expect
the private sector across the world to be generating this vast
volume of data without giving them more general feedback and an
opportunity to discuss the methodology. There are various other
important issues that are on the work programme for the coming
year, such as the reliance the private sector can place on know
your customer due diligence processes that have been carried out
by other financial institutions; and I could go on. So I think
there is an awful lot more work to be done.
Q397 Baroness Henig:
So you are quite optimistic then that this very important relationship
is deepening?
Sir James Sassoon: I think it will require committed
presidencies who regard this as an important component of the
FATF's work because it is discretionary around the core work,
which is driving the standards forward in the FATF plenaries.
I am optimistic but it is not going to happen unless it is very
consciously pushed.
Q398 Baroness Henig:
So it is a leadership issue as much as anything in terms of who
is driving the FATF's agenda?
Sir James Sassoon: Correct.
Q399 Lord Mawson:
What do you regard as the major accomplishments of the 2007-08
UK Presidency of the FATF?
Sir James Sassoon: I have talked about the private
sector so I will not repeat that one. That was one that was certainly
central to our agenda. I have also talked about the question of
the mandate of the FATF and the fact that we conducted the four
year review of the mandate. We convened the meeting that I described,
for ministers to have a proper discussion because there certainly
had not been a ministerial meeting for four years and my sense
was that in some of the previous ministerial meetings it had not
always been the ministers themselves who attended. Actually getting
the ministers to look at a refreshed mandate, which included some
new elements, particularly the commitment of the FATF to produce
a regular global threat assessment, something that they had not
done before, and to get into the mandate references to measuring
the impact of the regimes, those were the first two areas. The
third thing which was a priority of ours and that we made progress
on was helping low capacity countries with the implementation
of the FATF recommendations. I think it is quite right that there
should only be one set of recommendations that apply globally.
We cannot say there is one set of recommendations for countries
below a certain level of per capita income or something. On the
other hand, when I went to meetings of two of the African groupings
of countries, if you had the justice minister of Sierra Leone,
for example, around the table with his fellow ministers from countries
which are struggling to be supportive members of the wider group
of FATF members, they do need a lot of help. The fact that, under
our presidency, we produced guidance for low capacity countries
on the implementation of the standards was important to the UK.
Two more things. The new approach that we rolled out for dealing
with non-cooperative countries started to bear some fruit under
our presidency and has borne more fruit in the succeeding nine
months. The last thing I would highlight is the launch of the
so-called Three Presidencies Paper which was the review that we
decided should be kicked off to look at the FATF standards because,
as we come towards the end of the Third Evaluation Round, we thought
it was important and appropriate for the overall standards to
be subject to a periodic review.
Chairman: We are coming to the Three
Presidencies Paper in a moment.
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