A Council of Europe report published on Monday and seen by EURACTIV highlights key vulnerabilities in Monaco’s measures against money laundering and the country risks being placed under intense scrutiny by the international Financial Action Task Force (FATF) watchdog.
The report insists Monaco faces significant money laundering risks, mostly due to the “internationally oriented financial activities” that are being offered – and the Principality is a “prime target” for illicit cross-border financial flows.
In most cases, frauds are committed abroad, while the proceeds of the crime are laundered in Monaco, the report noted.
Risk analyses, international cooperation, and the dissuasiveness of sanctions are not completely fit to face fraud and corruption risks, it adds.
Risks associated with terrorism financing, which FATF also regulates at an international level, have been found to be relatively low, though more in-depth analyses are required by Monesgasque authorities.
The country is due to enter a one-year observation phase after the report goes to FATF plenary on 20 February. Should structural reforms not see the light of day in that period, they risk being named and shamed in a public ‘grey list’. Monaco had its name on the grey list until it was removed in 2009.
The report shines a renewed spotlight on Monaco and its financial industry, which has recently been accused of protecting the fortune of Russian oligarchs before aligning with international sanctions against Russia.
The report is the outcome of a several months long evaluation by the Council of Europe’s Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL). MONEYVAL assesses Council members’ compliance with international standards and makes policy suggestions based on FATF’s 40 recommendations.
In the face of existing threats, the report claims the effectiveness of the Anti-Money Laundering (AML) system is “uneven”, and not all risks have been effectively accounted for. This is particularly true regarding laundering the proceeds of income tax fraud committed abroad: income tax evasion is not criminalised in Monaco, and no serious risk analysis has been undertaken.
“Significant improvements” are also required in Monaco’s supervisory activities of financial institutions and non-financial businesses such as real estate agents, property dealers and private banking – which face little to no formal regulation but through which heavy loads of money can transit.
According to the report, these business sectors represent high-risk financial fraud profiles, though no adequate system really was implemented during the evaluation period, which ran up to March 2022.
Implementing a risk-based supervision approach “so that the intensity, as well as the frequency of on-site inspections, can be adjusted according to risks” is deemed imperative.
Guidelines for wealth management and private banking firms, which present the highest risk levels, must also be introduced to ensure greater compliance with the country’s supervisory framework.
Investigations and prosecutions inadequate
A key concern the report found is that of money laundering-related prosecutions and sanctions. Many cases fail to be identified by the authorities in the first place – while the speed of investigations begs questioning.
This speaks to inherent problems in the Monaco judiciary system, where the Prosecutor General has limited investigatory powers, staff numbers are insufficient, and filing an appeal is not time-limited. All in all, investigations can last up to 10 years, the report found.
As such, handling complex financial fraud cases remains inadequate – and the number of money laundering cases appears far too low compared to Monaco’s risk profile. Only six convictions were handed between 2017 and 2021, despite recent legislative developments to speed processes up.
As for sanctions that have been put in place, they “are proportionate but not effective or dissuasive, and they have only been imposed once.” Overall, the system that applies to investigations and prosecutions has shown “low levels of effectiveness”.
International cooperation facing obstacles
While Monaco is rather active in enhancing international cooperation, the domestic legislation imposes “unusual and fundamental obstacles” to returning the responses to requesting countries. The fact that individuals involved in a cross-border investigation can lodge an appeal in Monaco ultimately slows the process down considerably and has proven to hinder international investigations in the past.
Likewise, Monaco’s demands for international support works generally well, though it is not always in line with the associated risks. Of note, “no requests for confiscation have been made, although in case of two ML convictions the property had left Monaco”.
“Substantially” improving response times, and adapting the domestic legislation such that appeal time limits are imposed ought to be priority action items for the Monegasque authorities.
The Monegasque government told EURACTIV it “adhered fully to the policy recommendations of the report”, and was determined to implement them quickly in an effort to align to international standards.
The report was approved at the MONEYVAL plenary on 9 December 2022. It is almost certain the FATF plenary on 20 February will bring Monaco into a one-year observation period, during which the Monegasque authorities will work actively with FATF in the year to address structural deficiencies.
Should Monaco fail, it runs the risk of being ‘grey-listed’ as early as mid-2024. Countries that have been grey listed include Albania, Barbados, Gibraltar, Morocco, and Panama, among others. Monaco was in a similar “Uncooperative Tax Havens” OECD list until 2009.
A one-year observation period “does not speak to a general failure of the AML system in Monaco, but rather is the sum of observations made on a set of different issues”, the government added.
The Monegasque authorities have undertaken a set of legislative reforms since April 2022 to best tackle the report’s priority concerns, especially in the space of non-financial business space.