` Anti-money laundering and counter-terrorist financing measures Bangladesh Mutual Evaluation Report October 2016 The Asia/Pacific Group on Money Laundering (APG) is an autonomous and collaborative international organisation founded in 1997 in Bangkok, Thailand consisting of 41 members and a number of international and regional observers. Some of the key international organisations who participate with, and support, the efforts of the APG in the region include the Financial Action Task Force, International Monetary Fund, World Bank, OECD, United Nations Office on Drugs and Crime, Asian Development Bank and the Egmont Group of Financial Intelligence Units. APG members and observers are committed to the effective implementation and enforcement of internationally accepted standards against money laundering and the financing of terrorism, in particular the Forty Recommendations of the Financial Action Task Force on Money Laundering (FATF). For more information about the APG, please visit the website: www.apgml.org This mutual evaluation report was adopted by the APG at its annual meeting in September 2016. © October 2016 APG No reproduction or translation of this publication may be made without prior written permission. Applications for permission to reproduce all or part of this publication should be made to: APG Secretariat Locked Bag A3000 Sydney South New South Wales 1232 AUSTRALIA Tel: +61 2 9277 0600 E mail: CONTENTS EXECUTIVE SUMMARY ............................................................................................................................. 4 Key Findings ................................................................................................................................................ 4 Risks and General Situation ......................................................................................................................... 6 Overall Level of Effectiveness and Technical Compliance ......................................................................... 7 Priority Actions .......................................................................................................................................... 12 Effectiveness & Technical Compliance Ratings ........................................................................................ 14 MUTUAL EVALUATION REPORT ........................................................................................................... 16 Preface ....................................................................................................................................................... 16 CHAPTER 1. ML/TF RISKS AND CONTEXT ...................................................................................... 17 ML/TF Risks and Scoping of Higher-Risk Issues ..................................................................................... 18 Materiality .................................................................................................................................................. 20 Structural Elements .................................................................................................................................... 21 Background and other Contextual Factors ................................................................................................. 25 CHAPTER 2. NATIONAL AML/CFT POLICIES AND COORDINATION......................................... 31 Key Findings and Recommended Actions ................................................................................................. 31 Immediate Outcome 1 (Risk, Policy and Coordination) ............................................................................ 31 CHAPTER 3. LEGAL SYSTEM AND OPERATIONAL ISSUES ........................................................ 37 Key Findings and Recommended Actions ................................................................................................. 37 Immediate Outcome 6 (Financial Intelligence ML/TF) ............................................................................. 41 Immediate Outcome 7 (ML Investigation and Prosecution) ...................................................................... 46 Immediate Outcome 8 (Confiscation) ........................................................................................................ 53 CHAPTER 4. TERRORIST FINANCING AND FINANCING OF PROLIFERATION ........................ 60 Key Findings and Recommended Actions ................................................................................................. 60 Immediate Outcome 9 (TF Investigation and Prosecution) ....................................................................... 62 Immediate Outcome 10 (TF Preventative Measures and Financial Sanctions) ......................................... 67 Immediate Outcome 11 (PF Financial Sanctions) ..................................................................................... 73 CHAPTER 5. PREVENTIVE MEASURES ............................................................................................ 76 Key Findings and Recommended Actions ................................................................................................. 76 Immediate Outcome 4 (Preventive Measures) ........................................................................................... 77 CHAPTER 6. SUPERVISION ................................................................................................................ 84 Key Findings and Recommended Actions ................................................................................................. 84 Immediate Outcome 3 (Supervision) ......................................................................................................... 85 CHAPTER 7. LEGAL PERSONS AND ARRANGEMENTS ................................................................ 96 Key Findings and Recommended Actions ................................................................................................. 96 Immediate Outcome 5 (Legal Persons and Arrangements) ....................................................................... 97 CHAPTER 8. INTERNATIONAL COOPERATION ............................................................................ 101 Key Findings and Recommended Actions ............................................................................................... 101 Immediate Outcome 2 (International Cooperation) ................................................................................. 102 Anti-money laundering and counter terrorist financing measures in Bangladesh – 2016 © APG 2016 2 TECHNICAL COMPLIANCE ANNEX..................................................................................................... 110 Recommendation 1 - Assessing risks and applying a risk-based approach ............................................. 110 Recommendation 2 - National cooperation and coordination .................................................................. 113 Recommendation 3 - Money laundering offence ..................................................................................... 115 Recommendation 4 - Confiscation and provisional measures ................................................................. 116 Recommendation 5 - Terrorist financing offence .................................................................................... 118 Recommendation 6 - Targeted financial sanctions related to terrorism .................................................. 119 Recommendation 7 – Targeted financial sanctions related to WMD proliferation ................................. 122 Recommendation 8 – Non-profit organisations ....................................................................................... 123 Recommendation 9 – Financial institution secrecy laws ......................................................................... 129 Recommendation 10 – Customer due diligence ...................................................................................... 130 Recommendation 11 – Record-keeping ................................................................................................... 132 Recommendation 12 – Politically exposed persons ................................................................................. 133 Recommendation 13 – Correspondent banking ....................................................................................... 134 Recommendation 14 – Money or value transfer services ........................................................................ 135 Recommendation 15 – New technologies ................................................................................................ 136 Recommendation 16 – Wire transfers ...................................................................................................... 137 Recommendation 17 – Reliance on third parties ..................................................................................... 140 Recommendation 18 – Internal controls and foreign branches and subsidiaries ..................................... 140 Recommendation 19 – Higher-risk countries .......................................................................................... 141 Recommendation 20 - Reporting of Suspicious Transactions ................................................................. 142 Recommendation 21 – Tipping-off and confidentiality ........................................................................... 142 Recommendation 22 – DNFBPs: customer due diligence ....................................................................... 143 Recommendation 23 – DNFBPs: Other measures ................................................................................... 143 Recommendation 24 – Transparency and beneficial ownership of legal persons ................................... 144 Recommendation 25 – Transparency and beneficial ownership of legal arrangements .......................... 149 Recommendation 26 – Regulation and supervision of financial institutions ........................................... 152 Recommendation 27 – Powers of supervisors ......................................................................................... 155 Recommendation 28 – Regulation and supervision of DNFBPs ............................................................. 156 Recommendation 29 - Financial intelligence unit ................................................................................... 158 Recommendation 30 – Responsibilities of law enforcement and investigative authorities ..................... 159 Recommendation 31 - Powers of law enforcement and investigative authorities ................................... 161 Recommendation 32 – Cash couriers....................................................................................................... 163 Recommendation 33 – Statistics .............................................................................................................. 165 Recommendation 34 – Guidance and feedback ....................................................................................... 166 Recommendation 35 – Sanctions ............................................................................................................. 167 Recommendation 36 – International instruments .................................................................................... 169 Recommendation 37 - Mutual legal assistance ........................................................................................ 169 Recommendation 38 – Mutual legal assistance: freezing and confiscation ............................................. 170 Recommendation 39 – Extradition .......................................................................................................... 171 Recommendation 40 – Other forms of international cooperation ............................................................ 172 Summary of Technical Compliance – Key Deficiencies ......................................................................... 175 TABLE OF ACRONYMS .......................................................................................................................... 181 Anti-money laundering and counter terrorist financing measures in Bangladesh – 2016 © APG 2016 3 EXECUTIVE SUMMARY EXECUTIVE SUMMARY BANGLADESH 3RD ROUND APG MUTUAL EVALUATION REPORT 2016 1. This report provides a summary of the anti-money laundering and combating the financing of terrorism (AML/CFT) measures in place in Bangladesh as at the date of the end of the on-site visit (22 October 2015). It analyses the level of compliance with the FATF 40 Recommendations and the level of effectiveness of Bangladesh’s AML/CFT system, and provides recommendations on how the system could be strengthened. Key Findings Bangladesh has made significant progress since the last Mutual Evaluation Report (MER) in 2009, reflecting political commitment and leadership on AML/CFT . Bangladesh faces significant money laundering (ML) and terrorism financing (TF) risks and competent authorities have a reasonable understanding of those risks. The National Risk Assessments (NRA) and sectoral risk assessments add to effectiveness and guide national strategies, however they do not comprehensively cover threats and TF. Inter-agency work to assess TF risks shows strengths, but more work is needed to assess foreign TF threats, to further assess ML threats and to share information on TF risks with the private sector. Bangladesh has a range of high-level coordination committees to set policy and coordinate AML/CFT priorities. The high-level National Coordination Committee (NCC) is well structured and draws on technical expertise from relevant agencies and has been instrument in driving key AML/CFT reforms. There were well functioning policy coordination structures for countering the financing of terrorism (CFT) and for implementing United Nations Security Council Resolutions (UNSCRs) against terrorism and proliferation of weapons of mass destructions (WMD). At operational levels, coordination and cooperation occur to a varying degree although recent reforms have sought to address identified issues particularly between law enforcement agencies (LEAs). The 2015-17 National AML/CFT Strategy and CT strategies are, in part, driven by findings of risk assessments. AML/CFT strategies complement other strategies including CT priorities, but corruption-related ML remains the biggest unmitigated risk area. Bangladesh Financial Intelligence Unit (BFIU) demonstrated strengths in capacity and outputs. The quality of BFIU disseminations was generally good; however improvement is needed with the quality and quantity of reporting to the BFIU and LEAs’ systematic use of financial intelligence for predicate offences and ML beyond corruption cases. Anti-money laundering and counter terrorist financing measures in Bangladesh – 2016 © APG 2016 4 EXECUTIVE SUMMARY The ACC had done a significant number of ML investigations related to corruption, but not other offences and until late 2015 Bangladesh had not sufficiently prioritised ML investigations and prosecutions consistent with the risk profile (ie predicates beyond corruption). At the time of the onsite visit only ML five trials had been completed and four convictions obtained, with 214 ML prosecutions pending due to lengthy delays with the courts. The October 2015 legislative amendments allow ML investigations by all relevant LEAs. Provisional measures and confiscation outputs by LEA were low and most often related to instruments of crime. LEAs need to prioritise tracing, restraint and confiscation of proceeds. The BFIU’s powers to trace and freeze funds held on account adds to effectiveness. Seizures and confiscations by the Bangladesh National Board of Revenue (NBR - Customs and Tax) added effectiveness in some high risk areas. Lengthy delays and capacity challenges in the justice system undermine effectiveness. The courts and the Attorney-General’s Office (AGO) are seriously under-resourced. ML and predicate trials are often delayed over many years and issues with judicial independence of the lower courts add to capacity challenges. Special Courts give the greatest priority to CT and terrorism trials and the TF trials have not been delayed. Bangladesh has conducted preliminary investigations (enquiries) into a large number of TF cases and a full investigation of 23 cases. A small number of TF prosecutions have been successful and a number are pending. Bangladesh’s focus on terrorism prevention and de-radicalisation adds to effectiveness. While Bangladesh has managed to combat TF threats related to ISIL, financing of foreign fighters is an emerging issue. Bangladesh has a comprehensive regulatory framework for targeted financial sanctions (TFS) against terrorism. Bangladesh has designated six (6) domestic groups under UNSCR 1373. Outreach and implementation by reporting organisations (ROs) has not led to ROs spontaneously identifying matches with persons acting on behalf of designated entities to freeze assets. Freezing has predominantly occurred in cases where LEAs arrest members of a proscribed group and take TFS freezing actions pursuant to the designations. AML controls on the not-for profit (NPO) sector go significantly beyond the obligations in the FATF standards, but are not in keeping with TF risks. Stringent requirements on NPOs receiving foreign funding place onerous obligations on that part of the sector, but may not address domestic TF risks. Oversight and supervision does not adequately target TF risk. The recent NPO sector review considers some TF risk elements. Bangladesh has a comprehensive legal and regulatory framework for TFS against WMD proliferation. Supervision of PF-related obligations by banks was undertaken, however this needs to be extended to other sectors. A number of case studies demonstrate levels of effectiveness of TFS systems and vigilance measures by authorities. Bangladesh has made important progress with preventive measures for the financial sector and DNFBPs and has applied significant resources to raise ROs’ awareness of their AML/CFT obligations. ROs have made some progress in moving to a risk-based approach (RBA) implementation of preventive measures and rules-based implementation has deepened. Further implementation of key preventive measures is needed within and beyond the banking sector, in particular customer due diligence (CDD), domestic politically exposed persons (PEPs) and suspicious transaction reports (STR) reporting and wire transfers. Anti-money laundering and counter terrorist financing measures in Bangladesh – 2016 © APG 2016 5 EXECUTIVE SUMMARY Bangladesh has controls in place to prevent criminals and their associates from entering the market, albeit with some gaps. Whilst improvements were being made, significant fit and proper risks with the board and management of state-owned commercial banks were not being sufficiently mitigated. Bangladesh Bank (BB) needs to prioritise the RBA to supervision consistent with the risk profile. The frequency, scope and intensity of on-site inspections of commercial banks and non-bank financial institutions (NBFIs) were generally sufficient however there were inadequate resources available to undertake comprehensive supervision across all sectors, particularly DNFBPs. Available fines and sanctions were generally low and rarely applied. Measures to ensure transparency and prevent misuse of legal persons and arrangements were not well established or implemented. Registration requirements for basic ownership were not well implemented. Beneficial ownership information was not required to be collected by legal persons or parties to legal arrangements. ROs’ obligations to understand the beneficial ownership of customers do not sufficiently mitigate risks of misuse of legal persons and arrangements. Bangladesh demonstrated its strong commitment to international cooperation and its open and responsive approach to fulfil requests received from foreign partners. While the BFIU actively requests international cooperation and there have been some important successful mutual legal assistance (MLA) requests by Bangladesh, the overall level and focus of requests for international cooperation by LEAs, Customs and prosecutors (MLA) was not in keeping with the risk profile. Risks and General Situation 2. Bangladesh faces ML and TF risks from both domestic and trans-national sources. The underlying proceeds-generating crime levels are relatively high, with corruption, bribery and related offences of fraud generating the most significant proceeds of crime. Corruption remains a significant risk for Bangladesh, with corruption connected to a range of other predicate offences and its consequences undermining governance and development. 3. Bangladesh is a destination and trans-shipment point for illegal drugs and smuggling of goods and gold smuggling remains a key risk along with human trafficking and people smuggling. Bangladesh has notable insider trading and market manipulation risks even with recent reforms to the sector. Bangladesh has identified a range of ML techniques, including use of formal banking channels, trade-based ML, informal transfer for laundering outside of Bangladesh, and real estate investment. 4. Bangladesh is exposed to TF threats chiefly from domestic terrorist groups with an increase in attacks in the recent past and a significant number of terrorism arrests and prosecutions. Authorities indicate these domestic groups operate with relatively small-scale funding and Bangladesh has not, in general, been a source of TF for foreign terrorist groups. Whilst trans- national terror groups have publicly pronounced links to Bangladesh, authorities had not identified any concrete association between domestic and trans-national terror groups nor the financing of such groups at the time of the on-site visit. Relatively few Bangladeshi nationals have been recruited as foreign terrorist fighters. Anti-money laundering and counter terrorist financing measures in Bangladesh – 2016 © APG 2016 6 EXECUTIVE SUMMARY Overall Level of Effectiveness and Technical Compliance 5. Bangladesh has made considerable progress with the legal and institutional framework since the last assessment in 2009. The levels of technical compliance with the 40 Recommendations are generally high, but levels of effectiveness across the 11 immediate outcomes are more mixed. The BFIU, including with its regulatory and supervisory roles, is the strongest building block of effectiveness, but other areas require further improvement. Bangladesh demonstrates increasingly credible results in relation to pursuing financial aspects of terrorism, including TF prosecutions. Of particular concern was the failure of the Anti-Corruption Commission (ACC) to fulfil its role as sole ML investigation authority for the wider range of predicates beyond corruption prior to October 2015. The October 2015 Money Laundering Prevention Act 2015 (MLPA) amendments allow a wider range of LEAs to use AML tools to investigate proceeds of crime should improve effectiveness in the future. AML/CFT regulation and supervision of the financial sector is increasingly risk based, but very significant ongoing corruption/fraud/ML risks are present with the state owned commercial banks which require further risk mitigation. Overall Level of Effectivess and Technical Compliance Assessment of risks, coordination and policy setting (Chapter 2 - IO.1; R.1, R.2, R.33) 6. Bangladesh generally has a good understanding of its key ML/TF risks having undertaken two NRAs, initially in 2011 and most recently in 2015. The 2015 NRA identified five threats - corruption, fraud, forgery, human trafficking and smuggling (including gold and drugs) as high risk. Four sectors with high risks for ML were identified: banking, NBFI (finance companies), real estate and jewellery sectors. Bangladesh has also undertaken sectoral risk assessments which complement its understanding of ML/TF risk generally. The NRA process included real strengths, but did not comprehensively cover ML threat areas and TF in sufficient detail. Key risk areas such as drug trafficking, tax evasion and smuggling of goods required further analysis. Deeper assessments of risks with state-owned commercial banks are needed. 7. Terrorism threats and associated TF risks were lightly covered in the public NRA, but were more comprehensively assessed through inter-agency processes coordinated in the Cabinet Division and involving a wide range of LEAs and security intelligence agencies. Information provided on the focus and scope of TF-related assessments and interviews with LEAs and intelligence agencies highlight their understanding of the dynamics of TF risks facing Bangladesh. 8. A 2015-2017 National Strategy was prepared taking into account the 2015 NRA findings and is a key strength. However, some of the weakness in the NRA is ROsreflected in there being insufficient measures in the strategy to prioritise operational activities to mitigate ML and TF threats. CT and CFT policy priorities were well integrated and reflect findings of risk assessments. 9. A high-level NCC responsible for developing and coordinating ML and TF policy is convened by the Finance Minister and a Working Committee comprising of 23 relevant agencies. The MLPA and associated rules give these structures a statutory basis. Bangladesh has good operational coordination structures to mitigate ML and TF. 10. In relation to TF, in addition to the NCC there are a number of coordination structures relating to CT which include CFT. The Cabinet Division Taskforce coordinates operational work including joint agency assessments of terrorism threats. The National Committee on the Implementation of the UNSCR on Combating TF and WMD Proliferation is mandated to monitor Bangladesh’s implementation of UNSCRs relating to terrorism and financing of proliferation of WMD. Further security intelligence coordination structures support domestic cooperation and coordination. Anti-money laundering and counter terrorist financing measures in Bangladesh – 2016 © APG 2016 7 EXECUTIVE SUMMARY 11. Whilst private sector stakeholders and other relevant organisation were involved in the NRA process to a limited degree, in general the understanding of risk and application of mitigating measures across the private sector is limited. The results of TF assessments are not distributed amongst the private sector. The preliminary results of the 2015 NRA were shared with the banking sector but not with other sectors. The securities sectoral risk assessment was shared with industry however a lack of understanding of risks in that sector remains. Despite efforts to raise awareness, there is relatively little detail in the NRA to guide implementation as the NRA focuses on legal and institutional vulnerabilities. The basis upon which the private sector then is able to apply the findings in the NRA to daily practice is not apparent. Financial intelligence, money laundering and confiscation (Chapter 3 - IOs 6, 7-8; R.3, R.4, R.29-32) 12. The BFIU receives a good range of reports from an increasingly wide range of reporting organisations (ROs) and from government. BFIU functions well with sophisticated systems and has skilled, well-trained and experienced staff to add value to reports to develop financial intelligence (operational and strategic). The BFIU regularly seeks information from international counterparts. The BFIU has the powers and mechanisms to obtain information from ROs, government authorities and foreign partners. BFIU demonstrated well performing analysis capabilities and the dissemination of a range of good quality intelligence products related to ML, predicates and TF. The suggested moderate improvements to ensure greater effectiveness of the BFIU relate mostly to efforts to improve the quality and quantity of reporting and the use of financial intelligence by LEAs. 13. Use of financial intelligence is mixed amongst LEAs but there are signs of recent improvement. The good quality BFIU disseminations were applied by ACC in relation to ML and corruption and by most LEAs for predicate investigations, but greater use is needed to be effective. LEAs make better use of BFIU intelligence for combating TF and terrorism. LEAs place a high level of trust in the BFIU, reflecting its quality disseminations and its targeted support to LEA investigations. 14. Until the amendment of the MLPA in October 2015, the ACC was the sole authority investigating ML. ACC did not pursue ML associated with predicates other than those investigated by the ACC. The ACC did not demonstrate good implementation of available powers in the ML cases it conducted. LEAs can now access MLPA powers to conduct ML investigations with the predicate investigations. 15. Bangladesh had four ML convictions and one acquittal at the time of the onsite, but 214 ML prosecutions were under trial. Three of the convictions were made in absentia. Sanctions in those cases were proportionate. Resourcing constraints and process challenges with the courts and trials lead to very lengthy legal processes and hinder effective ML investigations and prosecutions. 16. Overall levels of confiscation were low and mostly reflect instrumentalities of crime. LEAs did not sufficiently focus on restraint and confiscation for key risk areas. LEAs generally did not effectively trace, restrain and manage proceeds of crime at an early stage in investigations which leads to a limited ability to ultimately recover proceeds of crime. BFIU’s powers and experience in tracing and freezing funds held on account added to effectiveness to some extent. Customs and BFIU need to more regularly utilise the results of the cross-border cash declaration system to address ML and TF risks. Terrorist financing and financing of proliferation (Chapter 4 – IOs 9-11; R.5-8) 17. Financial investigations of terrorism and related TF investigation and prosecutions are given priority and generally reflect the risk profile. Bangladesh focused on domestic groups and was giving increased focus to groups with trans-national elements. Anti-money laundering and counter terrorist financing measures in Bangladesh – 2016 © APG 2016 8 EXECUTIVE SUMMARY 18. There had been only two TF convictions at the time of the onsite visit, however there were a large number of ongoing prosecutions and investigations. TF prosecutions were reasonably well supported and prosecution of terrorism and TF offences is given the highest priorities by the courts, which results in far fewer delays that the general court systems. Bangladesh’s focus on terrorism prevention and de-radicalisation added to efforts to prevent and combat TF. 19. Bangladesh has a high degree of technical compliance for TFS and Bangladesh has recently made 1373 designations of domestic terror group bringing the total to six proscribed terror groups. Bangladesh has not taken steps to seek foreign recognition of these designations and has not always comprehensively considered foreign requests for giving effect to their designations. Cases of asset freezing under TFS have been reactive to LEA investigations confirming connections between persons and the six entities designated under 1373. There were very few cases of freezing property owned or controlled indirectly by Anti-Terrorism Act (ATA) proscribed entities. 20. Bangladesh has issued guidance and conducted a lot of awareness raising and outreach to the banking and other sectors on TFS. This was also a major area for offsite and on-site supervisory focus. While Bangladeshi banks have a good awareness of their obligations, it is lacking amongst DNFBPs. Overall implementation by ROs requires further support, including further specific guidance on risk elements to key sectors to guide vigilance and implementation. 21. AML/CFT controls on NPOs go well beyond the FATF standards and may disrupt legitimate NPO activities while still not addressing the TF risks. The detailed controls on the NPO sector primarily focus on funds coming into Bangladesh. Purely domestic NPOs are subject to few effective regulations for registration and transparency and registration and monitoring obligations are not well implemented. NGO Affairs Bureau (NGOAB) controls do not sufficiently focus on mitigating TF risk and there is some duplication in oversight and supervision between the NGOAB controls and the AML/CFT controls. Concern exists in the NPO sector as there are large numbers of NPOs that have not been targeted and monitored in relation to TF risk. The NRA and sectoral risk assessment assist NPOs take risk based approaches. Large-scale NPOs working in high risk zones are guided, to some extent, on risks by LEAs and the BFIU, which is a strength. 22. Bangladesh has a comprehensive legal and regulatory framework for TFS against WMD proliferation. Inter-agency coordination structures are in place to develop policies and guide implementation through the UNSCR committee chaired by the Ministry of Foreign Affairs (MFA). Banks have increasingly good awareness of TFS obligations. Supervision of those obligations is occurring in the banking sector, but implementation needs to be deepened beyond the banking sector and further supported with improved systems-based checking, additional guidance and continuing supervision. Bangladesh has identified a number of sectors exposed to Iran and Democratic Peoples Republic of Korea (DPRK) trade and entities and has taken priority actions in relation to specific cases. While no assets have been frozen, vigilance measures have led to interventions which support effectiveness. Preventative measures (Chapter 5 - IO.4; R.9-23) 23. Bangladesh’s preventative measures have a high degree of technical compliance with the FATF standards which establishes a good foundation to implement measures to understand and mitigate risks and adopt a risk-based approach. An increasing amount of awareness-raising has been conducted on AML/CFT risk elements, including findings from the 2011 NRA and some private sector involvement in the 2015 NRA process. There is still a lack of quality and detailed risk information available to the ROs on TF in Bangladesh. Anti-money laundering and counter terrorist financing measures in Bangladesh – 2016 © APG 2016 9